Mortgage arrears to curb Bradford & Bingley's profit

A subdued housing market and an increase in the number of buy-to-let property owners getting into mortgage arrears will restrain profit growth this year, Bradford & Bingley admitted yesterday.

But the prospect of cuts in interest rates later in the year, arrears starting to level off and government support for the buy-to-let market in 2006 was likely to put the company on a faster growth path, it said.

Steven Crawshaw, chief executive, said in a trading statement he was comfortable with the consensus of analysts' forecasts for its full-year profit to rise 6% to £297.5m.

Analysts said the soaring growth in the buy-to-let market, where B&B has a 22% share, had cooled and persistent concerns about arrears knocked 8.75p off the company's share price, leaving it at 326p.

Mr Crawshaw, who took over in March last year, has dismantled the strategy of his predecessor Christopher Rodrigues by selling the bank's estate agency business and loss-making mortgage broker Charcol to concentrate on mortgages and branch sales.

The company, which is the UK's ninth largest bank, said a restricted supply of new homes and the British obsession with property had kept the market buoyant, despite falling yields last year.

Hints by the Bank of England monetary policy committee about interest rate cuts could underpin further growth. The company said changes to pension rules in 2006 were also likely to give a further boost.

From April next year holders of Self Invested Personal Pensions will be allowed to buy residential property for the first time with funds in their pensions.

Experts estimate £10bn of pension cash will flood into the market, including tax relief worth £4bn, creating a boom in demand for the buy-to-let favourite: two bedroom flats.

Rival lender Paragon said last month that the buy-to-let market was benefiting as potential first-time buyers decided to rent amid uncertainty on house prices.

"New business volumes have grown steadily month on month from a low base as the fundamentals supporting credit quality and growth of the mortgage market remain strong," Mr Crawshaw said in the statement.

The upbeat stance on the housing market was offset yesterday by Your Mortgage magazine, which predicted prices are poised to fall by up to 12% in some areas of England during the next five years. The magazine said Leicestershire, Nottinghamshire, Bucking-hamshire and Northamptonshire, would see the biggest falls.

Other areas viewed as over-valued included Tonbridge & Malling, Kent, which is set to see a drop of 12.1% in the value of homes. In Chiltern, Buckinghamshire, it was predicted that prices could fall by 9.4%.

London, by contrast, is viewed as undervalued after some dramatic falls over the last year and residents should expect a rise of as much as 13% between now and 2009, the magazine said.