Nationwide, Britain’s biggest building society, has warned of further “downward pressure on house prices” as it unveiled a 64 per cent fall in first-half profits.

Underlying pre-tax profits at the mutually-owned mortgage lender tumbled to £117 million in the six months to September 30, from £322 million previously, hurt by a surge in writedowns against its commercial property portfolio and a hit to lending returns from low interest rates.

Graham Beale, chief executive, said Nationwide was “cautious on future prospects for the housing market”, adding that the growth in house prices over recent months “appears to be driven by lack of supply, and growth in unemployment throughout 2010 will inevitably exert downward pressure on house prices”.

Mr Beale also said the building society expects interest rates to remain at their current level “until at least the fourth quarter of 2010”.

Nationwide’s total impairment charges for the period held steady at £317 million, little changed from the £320 million reported for the previous six months. However, impairments on commercial property loans rose by nearly a quarter to £180 million.

Mr Beale repeated his criticism of the advantage that state-backed banks have received in attracting retail deposits. "We have elected not to chase market share in a retail savings market which is subject to serious competitive distortion and uneconomic pricing, often by institutions which benefit from actual or perceived unlimited Government guarantees". Nationwide reported a £5.6 billion fall in its retail savings balances during the six month period.

On Nationwide’s data, house prices have risen by 2 per cent year on year. But the lender said it would “not be surprising to see future setbacks in house prices” if the number of houses offered for sale returned to more normal levels or if interest rates rose more quickly than anticipated.

Nationwide also cautioned that it had not yet seen increasing levels of unemployment flowing through to mortgage arrears as previously anticipated.

“However, we do expect the level of mortgage arrears to trend higher as the full impact of rising unemployment crystallises and if base rates begin to rise as expected towards the end of 2010, we expect impairment charges on residential loans to rise from the current relatively benign level."

In contrast, Nationwide said that the worst for commercial property had passed.

“There are early signs that the commercial market has begun to stabilise. We do not expect to see further significant falls in security values and an end to recessionary conditions in the near term should signal that the bottom of the commercial property market has been reached," the building society said.

Nationwide took over Dunfermline building society earlier this year, after rescuing Derbyshire and Cheshire building societies in 2008. It has an estimated 8.3 per cent share of the residential mortgage market, and wrote new business with an average loan-to-value of 63 per cent in the first half of its financial year.

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