The increase in house prices slowed by 0.2% this year, the latest data from the Office of National Statistics showed.
Over the year to August 2012 UK average house prices increased by 1.8% compared with an increase of 2% in the year to July 2012.
The ONS house price index showed that on a seasonally adjusted basis, UK house prices rose by 0.1% between July and August.
Meanwhile prices of new dwellings rose by 3% during the 12 months to August 2012 and the price of pre-owned dwellings increased by 1.7% in the same period.
The year-on-year increase reflected growth of 2.1% in England, 0.5% in Scotland and 1.4% in Wales, which were offset by a decline of 12.8% in Northern Ireland.
However, annual house price increases in England were driven by a 6.3% rise in London and increases in the South East and West Midlands of 2.4 and 1.2% respectively.
Prices decreased by 0.7% in the South West and by 0.5% in both the East Midlands, and Yorkshire and the Humber.
David Brown, commercial director of LSL Property Services, blamed the slow growth of house prices on the “sluggish” mortgage market.
He said: “Any real upwards momentum in prices is being driven by cash investors and those with the most equity, so it is no surprise that the biggest annual growth is centered on London where there are simply larger concentrations of cash-rich purchasers."
Brown said that it was still too early to judge the effectiveness of Funding for Lending and whether it would give the mortgage market the boost it required.
He added:“Prospective buyers should take comfort from falling inflation instead. Inflation is at its lowest in nearly three years, a fact that should make a difference to those renters setting aside money each month for a deposit.”
The ONS also reported that Consumer Prices Index annual inflation stands at 2.2% in September 2012 down from 2.5% in August. This is the slowest rate of inflation since November 2009, when it was 1.9%.
However, Russell Quirk, director of the low cost estate agent emoov.co.uk, thought the ONS data highlighted the shortcomings of the government’s initiative.
He said: "The fanfare that greeted the arrival of the Funding for Lending Scheme in August now rings very hollow.
"This August data confirms that the effort to kickstart the mortgage market did little to lift house prices out of their torpor. Across the country, prices are plodding at best and plunging at worst.”
Quirk’s main concern lay with the rising gap between the expectations of buyers and sellers.
He said: "The buoyancy in the South East flatters to deceive. The gulf between sellers' expectations and prices actually achieved is getting wider. Yesterday's Rightmove Index found that asking prices rose by 3.5% last month alone. This is madness.
"This reality gap will do nothing to heal the market, as properties which are put on sale at unachievable prices will sit on the shelf and continue to depress the already patchy demand."