By Clara Ferreira-Marques
LONDON (Reuters) - House prices could retreat in 2010 if unemployment rises sharply, Britain's third-largest mortgage lender Nationwide warned on Friday.
A lack of supply and low interest rates have boosted the housing market this year, but Nationwide said prices could go into reverse with unemployment set to rise further and a stock shortage showing signs of easing.
"That phenomenon (tight supply) has now almost played out and we are back to more normal levels of demand for property," Chief Executive Graham Beale said.
"We are cautious about where unemployment is going. If it does rise significantly, that will have a downward pressure on house prices in the new year."
Having fallen sharply last year, UK house prices have gradually risen in recent months and Halifax, the UK's largest mortgage provider, said earlier this month prices had risen 1.2 percent in October, squeezing the annual decline to its smallest in 1-1/2 years.
But rising unemployment remains a threat to the recovery. Latest monthly UK jobless figures showed the number of Britons claiming unemployment benefit rising by the smallest amount in 18 months, but some economists expect the rate to rise further next year.
Falling house prices would have a knock-on effect on arrears across the residential lending sector, Beale added as Nationwide, Britain's largest customer-owned lender, said its earnings more than halved in the first half.
INVESTOR APPETITE
Nationwide said commercial property helped drive up its bad debt provisions in the six months to the end of September as business failures, weak tenant demand and reduced investor appetite hit prices.
But it said there was better news in prospect.
"The next couple of quarters -- which will include Christmas trading for all the retailers -- will be very important in determining where we go from here, but all recent evidence shows prices are no longer falling and investor appetite for the sector is starting to pick up," Finance Director Mark Rennison told reporters on a conference call.
The recovery would be slow and led by primary properties, with secondary and other sites continuing to struggle, he added.
Nationwide said its first-half earnings had been hit by compressed margins, bad debts and an outflow of savings, as consumers shifted to government-backed banks.
In the six months to the end of September, underlying profit before tax sank to 117 million pounds, after stripping out items including movements in the value of derivatives and a gain of 40 million from failed rival Dunfermline's social housing loans.
That compares with 322 million pounds a year ago.
Arrears remained well below its rivals, with 0.66 percent of accounts more than three months in arrears, compared with an industry average of 2.4 percent.
Its total impairment charge, however, remained high at 317 million pounds after a 320 million charge in the six months to April 4, hit by the decline in commercial property values.
Nationwide said UK gross lending dropped 47 percent in the six months as prime buyers remain elusive, adding the retail savings market remained challenging with 5.6 billion pounds of outflows -- a result of competition from government-backed National Savings & Investments and Northern Rock.
Mutually owned lender Nationwide took over Dunfermline building society earlier this year, after rescuing Derbyshire and Cheshire building societies last year.
Beale said the group did not rule out further deals in the sector, with further consolidation seen after most of its peers report results early in the new year, but said Nationwide was not currently in negotiations to acquire any other rivals.
(Editing by David Holmes)
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