House prices to avoid big drop, says Nationwide

The mortgage giant said the likelihood of low interest rates until late 2011 would help limit price declines, although it said the market would remain weak amid austerity measures.

Its forecast comes as Nationwide posted half-year results showing a 26 per cent rise in underlying profits to 147m.

The group said its margins – which have been hammered by historic low interest rates – had now turned the corner and said this would drive "a strong upturn" in future profits.

The UK's biggest building society said it expects prices to remain largely flat over the next few months, but dip "modestly" throughout 2011 as the supply of properties for sale outstrip the number of buyers in the market.

The group's profits were helped by sharply lower levels of struggling borrowers, with bad debts down by 44 per cent to 179m in the six months to September 30.

Losses on commercial property loans turned sour nearly halved, down 47 per cent to 95m.

But Nationwide confirmed the trend for lower mortgage business seen among its high street banking rivals this year as it reported negative net lending – loans less redemptions – of 1.8bn.

Its share of the mortgage market fell from 9.2m per cent in the previous six months to 8.5 per cent.

A strong ISA season helped it see a marked recovery in savings deposits, which have been impacted by low interest rates since the recession struck.

The mutual reported 400m in net retail deposits against 6.1bn outflows a year earlier.

Graham Beale, Nationwide chief executive, said the group had traded profitably despite "uncertain market conditions".

"The UK economy has continued to recover over the first half of the year, but still faces considerable challenges in the years ahead," he said. "In the housing market, conditions have weakened noticeably over the last six months, with both a decline in buyer demand and a modest downward trend in house prices."

"However, we believe that large house price falls of the magnitude seen in 2008 are unlikely given that interest rates will remain low and limit the level of mortgage arrears and distressed sales," he added.