Nationwide, Britain's second biggest mortgage lender, said bad loans are likely to rise and the mortgage market dwindle as an economic slowdown bites, although household savings could cushion the blow.
Investors concerned about the cost of living crisis will monitor Nationwide's view of the housing market especially closely after Britain's budget forecasting office on Thursday said the country faces a record hit to living standards.
That assessment was in response to Finance Minister Jeremy Hunt's budget aimed at saving 55 billion pounds ($65.52 billion) a year and repairing the damage from the market chaos caused by former prime minister Liz Truss's plans for sweeping tax cuts.
Ratings agency S&P has singled out Britain as one of the markets in Europe seeing early signs of house price deterioration. It says lenders are well placed to cope but could see a significant hit to profits.
"Household budgets are already under significant pressure, consumer confidence is low, borrowing costs are higher than they were at the start of the year, but there's still a good chance that we can achieve a relatively soft landing," Nationwide Chief Economist Gardner told Reuters.
Gardner said a shortage of new housing would support prices, and low unemployment and savings built up in recent years would help homeowners to continue payments.
Economists also expect a short-term boost from Finance Minister Hunt's decision to phase out planned cuts on stamp duty - a tax on purchases of homes - by 2025, creating an incentive in the near term for prospective buyers to hurry up.
Nationwide's results showed the impact of the turbulent environment as interest rate rises aimed at combating inflation have the effect of boosting banks' profits, while augmenting costs for individuals in the form of higher mortgage payments.
Nationwide reported profit for the six months rose 13% to 969 million pounds from the same period a year ago, as the increase in central bank interest rates boosted its lending income.
The lender said credit impairment charges rose to 108 million pounds from a net release of 34 million pounds set aside for potential loan losses in the first half of last year.
($1 = 0.8401 pounds) (Reporting by Lawrence White; Editing by Mark Potter, Jan Harvey and Barbara Lewis)
