Nationwide’s alert on rally after 64% fall

Chief executive Graham Beale said he was "pleasantly surprised" by the rise in house prices since the spring but added: "The big question is whether this is a real recovery."

He predicted interest rates will stay at record lows of 0.5% until the end of next year but said when they do go up it will send mortgage costs soaring.

It came as Nationwide, the UK's biggest mutual with 15 million members, reported a 64% collapse in first-half profits from £322 million to £117 million.

Beale said: "We expect the remainder of this year and next to present a very difficult trading environment. Economic recovery is forecast to be slow and we are also cautious on future prospects for the housing market.

"The growth in house prices over recent months appears to be driven by a lack of supply, and growth in unemployment throughout 2010 will inevitably exert downward pressure on house prices."

Beale said he was "quite pleased" with the profits given the severity of the global financial crisis and the depth of the recession in the UK.

Charges for bad debts hit £317 million in the six months to the end of September, marginally lower than the £320 million set aside in the previous six months, but far higher than the £74 million hit taken a year ago.

More than half, or £180 million, of the charges related to commercial property following the "dramatic fall" in values over the past two years.

Nationwide, the third-largest mortgage lender in the UK, said the number of borrowers more than three months in arrears on their mortgages remained well below the industry average thanks to its cautious lending practices.

Just 0.66% of its customers were in arrears against 0.64% six months ago. That is just over a quarter of the industry average of 2.4%.

Beale said: "In the last few months we have seen arrears plateau and start to go back down again. If we go back 18 months there were fears that we would see arrears race away but that hasn't happened, although there are concerns about what happens from here."

He said Nationwide's approach to lending "has remained cautious" —loan-to-value ratios average 63% — as it "strikes an appropriate balance between our desire to support existing members, first-time buyers and the wider economy" with the need not to take risks.

Savings dropped by £5.6 billion to £122.7 billion in the first half as low interest rates encouraged customers to withdraw cash and put it into the stock market or pay off debts.

Beale, who orchestrated the takeover of struggling rival Dunfermline this year having rescued Derbyshire and Cheshire last year, said he expected further consolidation in the industry.