The annual rate of house price inflation is now 2.3%, compared to 2.6% last month and 18.9% at this time last year. This is the slowest rate of annual growth since May 1996, according to figures from Nationwide today.

Prices in the three months to August increased by 0.3% and the price of a typical house in the UK is now £157,310 compared to £153,743 this time last year, said the lender.

House prices increased in eight out of the last twelve months, but the general path of house price inflation continues to be soft. Prices fell by 0.2% in August, reversing July’s increase and continuing the gentle slowdown seen since the start of the year.

Nationwide group economist Fionnuala Earley said: "In spite of a fair deal of bearish comment, the housing market has remained quite resilient this year following last year’s interest rate hikes."

"Price inflation has slowed gradually, but is still positive, and activity has been creeping up since the end of 2004. The current levels of monthly house purchase approvals, estimated at 97,000 in August, are now higher than at this time last year."

"Expectations of house prices are an important factor in transaction decisions and current data shows that consumers expect a continued controlled slowdown, with some modest falls in house prices next year. These expectations are now feeding into the market as estate agents report sellers adjusting their asking prices. This, along with the cut in interest rates, has made it more of a buyers’ market which has led to increased numbers of buyer enquiries and increased optimism about sales from estate agents."

While market activity seems to have stabilised, this does not signal the start of a further period of sustained growth in house prices, warned Fionnuala Earley. "Even though wage inflation is almost twice the rate of house price inflation, affordability is still an issue, particularly for first-time buyers, and it will take some time for the balance to be redressed," she said.

The first-time buyer house price to earnings ratio is significantly higher now than at the last peak. Even with lower mortgage rates, mortgage repayments absorb about one third of take home pay and the average first time buyer now needs to raise a deposit of almost £17,000 compared to around £11,000 in 2003 – more than a 50% increase in two years.

In terms of a proportion of gross annual income, a first time buyer’s deposit now accounts for 62% of gross annual pay compared to 20% sixteen years ago. However, this reflects that first-time buyers now borrow a smaller proportion of the purchase price than they did in 1989. This shows how ability to pay criteria, such as income multiples, constrain the amount that they can borrow.

Because of these higher deposits, it would now take a first time buyer almost three and a half years to save a deposit compared to just over one year in 1989.

"Such comparisons of affordability between these two high points in the cycle at first seem startling," said Fionnuala Earley. "But on the other hand, given that nominal interest rates are significantly lower, the debt burden is not as fierce. Mortgage payments account for 31% of take home pay now, compared to 35% then. In cash terms the average first time buyer now pays £518 per month, compared to £261 then. In today’s money this equates to £436 - about 20% less in real terms than now. But this is ignoring the impact of tax relief, which was still available in 1989."

Without this subsidy the equivalent figure in today’s prices would be £552. To put this in context, average first time buyer house prices have increased by 161% in the same period and the average mortgage size by 138%.