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The UK's largest building society today said it expected house prices to continue to fall next year as it announced it had cut lending by more than two-thirds.
Nationwide Building Society's chief executive Graham Beale said house prices would continue to fall by 1% to 1.5% a month for the rest of the year and there would be further price drops in 2009-10.
Last month, the society said prices were down 14.6% year on year, with the average price of a home now almost £30,000 less than a year ago.
Beale said interest rate cuts, which Nationwide has so far passed on to customers in full, would help the market.
"Rate cuts will help to minimise payment difficulties and alleviate payment shock as borrowers reach the end of their existing deals.
"Reducing prices will improve affordability, which should bring about a recovery in the first-time buyers' market."
Releasing its interim results for the six months to September 30, Nationwide said it had advanced £1bn worth of mortgages, when repayments and redemptions were taken into account.
This compares with £3.6bn in the same period last year. The society said the sharp drop – 72% – in new loans was the result of a "focus on quality" and a move away from funding loans through the money markets.
At the same time tightening margins and the increased cost of funding pushed the society's profits fall to £322m, down 18% from £394m in the same period last year.
New mortgages in the period were funded entirely by deposits from savers, who opened 6,000 accounts a day with the society and paid in £2.6bn over the six months.
Nationwide said it now had more than 14m members, 10.7m of them savers, and had increased its share of the savings market to 34% as savers sought a safe home for their cash.
However, there were signs borrowers were starting to struggle with mortgage repayments, as the society reported an increase in arrears and repossession.
The number of borrowers more than three months in arrears on mortgage repayments rose to 0.4% of mortgages from 0.36% in the six months to the end of April. The figure is less than a third of the industry average.
The number of homes repossessed by Nationwide more than doubled year on year, with 300 homes taken into possession, compared with 143 in the same period last year. Repossessions still only make up 0.02% of the society's book, compared with an industry average of 0.16%.
Although the society said it was well placed to survive the ongoing financial downturn, it has been hit by the credit crunch.
It had to write off £3m as a result the collapse of Lehman Brothers and £34m following the failure of Washington Mutual.
It will also have to provide funds for the Financial Services Compensation Scheme which faces pay outs for the failure of Icesave and Bradford & Bingley.
Chief executive Graham Beale said: "As a prudently run organisation it is highly regrettable that the cost of failure of banks which took on substantially greater levels of risk than we are prepared to should be borne by Nationwide's members."
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