The outlook for house prices and commercial property values could be bleak, according to a leading UK bank.

Lloyds Banking Group revealed yesterday that it is bracing for house prices to slump by as much as a fifth next year as it warned of a hit to mortgage lending amid mounting interest rates.

It expects the UK economy to shrink at least 1% next year, and by as much as 4.5% in a worst-case scenario.

The Telegraph reports today that profits at Lloyds fell to £1.5billion during the three months to the end of September, down more than a quarter from a year earlier and well below analyst forecasts of £1.8billion.

Lloyds said that higher interest rates and the dreary outlook for the economy is likely to lead to a slowdown in mortgage lending over the next year.

Its base-case scenario assumes a 7.9% drop in house prices, but at worst they could crash by almost 18%c.

Commercial property values could drop 36%

Commercial property prices are forecast to drop by at least 15%, with a slump of 36% predicted in the worst case.

Charlie Nunn, chief executive of Lloyds, said: "The current environment is concerning for many people and we are committed to maintaining support for our customers."

William Chalmers, chief financial officer of Lloyds, added: "We're likely to see a bit of a slowdown in mortgage lending over the course of the next 12 months in response to slightly-higher interest rates and the slightly tougher macro-economic environment.

"It is reasonable to expect the mortgage market to slow down during that time period. We will of course see a number of customers coming up for refinancing of their mortgage product, and we'll be making a full offering to those customers and making sure that customers are in as good a position as possible to afford that going forward."

Traders are betting on an 0.75% increase in interest rates when the Bank of England's Monetary Policy Committee meets on Thursday next week. Threadneedle Street has already raised rates from 0.25% to 2.25% this year in an attempt to tame rampant inflation.

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