UPDATE 3-UK lender Nationwide sees London property prices falling

Wed May 28, 2014 10:29am EDT

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* CEO says early signs of a "natural correction"

* Says estate agents starting to report price reductions

* Nationwide full year profit more than doubles

* Hits capital target a year ahead of schedule

* Pimco says UK house prices are peaking (Adds comment from investment firm Pimco, implications for UK Prime Minister, details on London market)

By Matt Scuffham

LONDON, May 28 (Reuters) - The price of homes in Britain's capital may start to fall this summer, UK lender Nationwide said on Wednesday, potentially reducing the need for new measures to cool London's red-hot property market.

House prices have soared in London as the economic recovery, record-low interest rates and government schemes help home buyers tempt purchasers into one of the world's most expensive property markets.

A housing bubble poses the biggest risk to the stability of Britain's $2.5 trillion economy, Bank of England Governor Mark Carney warned on May 18, a view backed by UK Prime Minister David Cameron. Carney said the bank was looking at ways to control mortgage lending amid a shortage of home building.

Nationwide's Chief Executive Graham Beale said officials should wait until the end of the summer before deciding on any action.

"My view is that in London we will see a natural correction through the summer months. That intense heat does seem to be dissipating a bit. We could be seeing the early signs of a natural correction," Beale told Reuters.

If house prices were to fall in the capital, it would be seen as positive for Cameron, because it would make it less likely that the central bank would raise interest rates before the next election in 2015.

The BoE has so far kept interest rates at a record low. Carney said last week that the bank was only edging towards an increase in borrowing costs and most economists in a Reuters poll shared that view.

Beale's forecast comes as the UK's third-largest mortgage lender, which has a 10 percent share of the London market, said it more than doubled its underlying profit last year and hit a capital target set by Britain's financial regulator a year early.

PEAKING OUT

Mike Amey, a managing director at Pimco, which runs the world's biggest bond fund, supported Beale's view.

"House prices look like they are peaking out at about 10 percent annualised which is not great but at least they are not going up further. I think it is going to ease back down," he told reporters at a presentation on Wednesday.

The BoE's Financial Policy Committee, whose main task is to identify and remove risks to Britain's financial system, meets on June 17 and could apply further mortgage controls.

Tighter rules on mortgage lending are widely believed to have dampened borrowing in recent months and Britain's banks last month approved the lowest number of mortgages since August 2013.

Cameron said this month that the government would consider scaling back its 'Help to Buy' mortgage guarantee scheme if Carney advised it would be prudent. The scheme allows people to buy property worth as much as 600,000 pounds ($1 million) with deposits as low as 5 percent, but the upper limit could be reduced to dampen its influence in London, where prices are higher than the rest of the country.

The average London house price is 458,000 pounds, up from 301,000 five years ago. Prices outside London are still several percent below pre-crisis peaks, even before adjusting for inflation, and transaction levels have not recovered either.

Beale said estate agents were reporting a drop in the number of viewings for properties and house price reductions. Official data showed house prices in London rose 17 percent in March on an annual basis, but less than a 17.8 percent increase in February.

Britain's biggest mortgage lender, Lloyds Banking Group , preempted a move by the central bank, saying this month that it was introducing tougher lending criteria to help tackle rising prices.

Lloyds, which is 25 percent-owned by the government, said it would limit mortgages to a maximum of four times a borrower's annual earnings when it is lending more than 500,000 pounds.

High loan-to-income ratios have become more common, with 17 percent of new mortgages for house purchases in London having loan to income ratios greater than 4 and a half times, the BoE said in its financial stability report in November 2013.

Some analysts said although the affordability of London homes was an issue, the main problem was a shortage of available housing.

"Given this supply issue, it will be interesting to see if a slowdown in rising house prices manifests itself into a full grown correction," said Ed Goodworth, real estate partner at accountancy and business advisor firm BDO. ($1 = 0.5952 British Pounds) (Additional reporting by William Schomberg; Editing by Huw Jones and Louise Heavens)

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