Nationwide warns mortgage market will crash by 80%

In the six months from April to September, Nationwide lent just £1 billion worth of new mortgages compared with £3.6 billion in the same period last year.

That was much less than half the money the building society took in the six months when the flight to quality saw savers pump in £2.6 billion as they avoided more risky banks and financial institutions.

Chief executive Graham Beale said: "We believe that the mortgage market could be as low as £18 billion this year while it was in excess of £90 billion last year. It is already down to a third of last year's levels and heading lower. Our share of the net new mortgage market has remained steady at around 6%."

Nationwide's reported pre-tax profits rose 11% to £374 million but underlying profits fell by 18% to £322 million.

Beale said that reflected lower margins as the society battened down the hatches during the credit crunch and made a "prudent decision to hold significantly higher levels of high grade liquidity and an increase in the cost of retail funding".

He said Nationwide now had more than £22.5 billion of liquid assets. Much of its money is now held on deposit at the Bank of England, in gilts or in short-term (typically eight days) instruments. These offer much lower yields than even slightly more risky instruments. All Nationwide's key balance-sheet ratios are stronger today then they were six months ago.

"Wholesale market conditions remain fragile," said Beale. "We expect the challenging economic environment in the UK to persist well into 2009."

Nationwide passed on the 1.5% interest rate cut to borrowers last Friday, and Beale said he had not come under any pressure from the Government to do so: "We do what is right for our members rather than looking after politicians."

He said he welcomed the Government and Bank of England's bailout and support for the banking industry but warned he would make sure competition was not reduced.