Mortgage market will shrink by 80 per cent this year, says Nationwide

The UK mortgage market will contract by 80 per cent this year, house prices will fall for another 12 months and the property sector will not stabilise until 2010, Nationwide said yesterday.

Alongside financial results showing that pre-tax profits were up by 11 per cent to £374m, the UK's second biggest mortgage lender said it had handed out just £1bn worth of mortgages in the six months to September, less than a third of the £3.6bn in the same period of 2007.

Tony Prestedge, the group development director at Nationwide, said: "Our forecast is now for the total mortgage market to be valued at £18bn this year, compared with £90bn last year."

The prognosis for 2009 is no more positive. Nationwide is expecting house prices – which are already £30,000 lower on average than last year – to continue to fall at a rate of between 1 and 1.5 per cent per month for the rest of the year and well into 2009.

"So far we have experienced a price reduction of more than 14 per cent since the market peaked in August 2007, and we expect a similar fall over the next year. We believe, peak to trough, there will be falls of around 25 per cent and it will be into 2010 before we see a stabilisation of the market," Mr Prestedge said.

The latest figures from the Royal Institution of Chartered Surveyors (Rics), published today, are no more cheery. Average transactions fell again last month, from 11.5 to 10.9 per agency – the lowest figure since the survey began in 1978. London is the worst-affected area, with six sales per agency, compared with the North-east's average of 16. The sales-to-stock ratio also fell to 13.5 per cent in October, the lowest figure since December 1992, suggesting further price falls to come.

Both Rics and Nationwide support last week's 1.5 percent point interest rate cut from the Bank of England to try to unlock the stifled housing market. But it will be some months before the effects are felt.

Mr Prestedge said: "There is a likely further contraction of the mortgage market next year, but the extent is hard to predict given both the base rate reduction and the Government's recapitalisation of the banking system, the benefits of which are still flowing through the system."

Homeowners are clearly starting to feel the strain. The proportion of Nationwide's mortgage accounts that are more than three months in arrears is 0.4 per cent – still low compared with an industry average of 1.33 per cent but higher than the mutual's 0.36 per cent level last April. The number of repossessions in the past six months is 300, more than double the 143 in the six months to September last year. The big concern was the effect of recessionary job losses, Mr Prestedge said.

And even with mortgage lenders passing on the Bank of England's interest rate reduction, the fundamentals of the current housing market – rising unemployment, concerns about recession, the expectation of further price falls – still tend towards sluggish activity for some time to come.

Howard Archer, the chief UK economist at IHS Global Insight, said: "Faster rising unemployment will lead to a marked rise in the number of forced house sales and it will also reduce the number of potential house buyers. Meanwhile, credit conditions are still relatively tight; and it will take time for confidence to improve and mortgage lending to pick up significantly."

Although Nationwide's profits were up 11 per cent, underlying profits dropped by 18 per cent to £322m, primarily due to holding higher levels of liquidity and the increased cost of retail funding, the company said.

The group has a tier-one ratio of 10 per cent and a strong balance sheet which includes £2.6bn of retail deposits received over the six-month period.