Nationwide says revival in housing market set to end

Building society attacks state-backed savings firms for distorting market

The mini revival in house prices is set to come to a juddering halt, Britain's biggest building society has warned.

Reporting a 62 per cent fall in pre-tax profits, Nationwide said it believed that house prices will "flatline" at best in the coming months because recent rises have been fuelled by a lack of supply of property rather than a true improvement in sentiment.

In its latest survey, Nationwide found British house prices in October were up 2 per cent on the year – the first annual rise for 19 months.

But Mark Rennison, finance director, said: "The housing market is showing a very mixed picture and we think it will probably flatline from here. There is a lot of evidence to suggest that the recent rises have been fuelled by a lack of stock." He added: "There is no evidence to suggest that will change and interest rates remain low which further supports the market. But on the other hand, unemployment is still rising and there are negatives that balance the positives out."

The building society also launched an attack on state-backed savings institutions, accusing them of "distorting the market" by offering rates which fully commercial organisations could not compete with and unfairly benefiting from consumers' perception of the value of a state guarantee.

Some £5.6bn of retail deposits were withdrawn from the bank in the half year to 30 September and Nationwide put this down to competition from institutions benefiting such as National Savings & Investments, Northern Rock and Lloyds Banking Group.

Mr Rennison highlighted an NS&I bond paying 3.95 per cent when wholesale funding between banks only makes money available at 0.95 per cent.

"It is impossible to compete with that," said Mr Rennison. "It is three per cent above Libor (the London interbank lending rate). You can't make it pay and it is an economically unrealistic rate to offer. We are not happy about some of the things Northern Rock is doing either and Lloyds is competing intensely."

The bank reported pre-tax profits of £143m. However, that was flattered by a one-off gain on the June purchase of the assets of Dunfirmline Building Society. Underlying profits were just £117m against £322m over the same period last year. Impairment charges for bad loans soared to £317m, although Nationwide said its mortgage arrears levels of 0.66 per cent were stable and only just over a quarter of the industry average of 2.4 per cent. The charge included a sharp increase in commercial property loan losses, which jumped to £180m from £25m.

Despite the rise Mr Rennison said he believed that while loan losses on residential mortgages and unsecured loans would remain at current levels for some time, commercial property losses could have peaked.

Graham Beale, chief executive, described the performance as "creditable". He went on to say: "Market conditions continue to be challenging, with strong competition in both residential lending and retail funding markets.

"Our performance has been substantially affected by the low interest rate environment and the dramatic fall in commercial property valuations which have led to compression in our margin and a sustained higher level of impairments."

Nationwide has been offering loans of up to 90 per cent of a home's value, although only to people who have current accounts with the society. It achieved an 8.3 per cent share of the gross residential mortgage market, writing new business with an average loan to value (LTV) of 63 per cent.

However, the withdrawal of savings meant the society's reliance on wholesale funding to sustain its mortgage book increased to 30.4 per cent from 28.6 per cent, even as the overall mortgage balance shrunk by £1.7bn, with customers continuing to pay their loans back rather than seeking to take out new debt.

Nationwide said: "Our approach to new lending has remained cautious, striking an appropriate balance between our desire to support existing members, first-time buyers and the wider economy, with the need to maintain a prudent lending risk profile."