Annual house price inflation now stands at 9.8%, down from 10.5% in April, with prices up 12.2% since the housing market’s lowest point in February 2009.

The fall in annual growth reflected the weaker rate of increase in May 2010 compared to May 2009.

Nationwide’s three-month-on-three-month rate, which is more stable than month-on-month growth, also rose from 1.1% in April to 1.7% in May, because February’s fall in house prices fell out of the most recent three-month average.

Martin Gahbauer, chief economist at Nationwide, said: “Housing market conditions remain characterised by thin transaction volumes and a relative scarcity of properties for sale, despite a slow return of more sellers in recent months. The current supply-demand balance on the market is still consistent with relatively stable to modestly upward trending prices.”

David Hollingworth, spokesman at London & Country, said: “There is much more stability in housing figures now, and that will help lenders to extend their portfolios into slightly higher LTVs.

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Yet, there is also room for prices to go back down. The biggest issue is how much confidence returns to the market and how lending opens up. It will take a while, because there are a lot of unknowns.”