House prices across the UK are rising at the slowest annual pace in more than five years, according to Britain’s biggest building society.

The average property value rose 1.6% in October from a year ago, down from September’s 2% and the lowest annual growth rate since May 2013, Nationwide said.

The squeeze on household budgets and the uncertain economic outlook is likely to have dampened demand, even though borrowing costs remain low by historic standards and unemployment is at 40-year lows, the lender said. It still expects house prices to rise by about 1% this year.

The average price of a home was flat between September and October, at £214,534.

Nationwide house price index Photograph: Nationwide

Other reports have shown that house prices in London and parts of the south-east are falling, partly because international buyers have been put off by the uncertain outcome of the Brexit negotiations. London and Brussels are still deadlocked in talks, just five months before the UK’s official departure from the EU.

Robert Gardner, Nationwide’s chief economist, said: “If the uncertainty lifts in the months ahead, there is scope for activity to pick up throughout next year. The squeeze on household incomes is already moderating and policymakers have signalled that interest rates are only expected to rise at a modest pace and to a limited extent in the years ahead.”

Property sales Photograph: HMRC

Brian Murphy, head of lending at Mortgage Advice Bureau, said: “Whilst the chancellor’s ‘feelgood’ budget on Monday delivered little for the majority of home movers, it seems to have been well received by consumers overall, therefore as we enter the final sprint of the autumn market before thoughts turn to the Christmas break, it’s quite possible that the market will continue to tick over at reasonable levels, although without the fireworks that some had hoped for by this stage in the year.”

However, property sales are still a long way from where they were before the financial crisis of 2007-2008. Gardner noted there were 1.2m sales in the 12 months to September – 30% lower than in the same period in 2007.

House sales cash vs mortgage Photograph: HMRC, UK Finance

Immediately after the crisis, more people bought property for cash and this has continued in recent years, partly because a higher proportion of people own their homes outright and are able to pay cash when they move, Nationwide said.

Recent years have also recorded a recovery in first-time buyer purchases, which are now back to where they were before the credit crunch, aided by the government’s help-to-buy scheme. At the same time, there has been a significant reduction in the number of buy-to-let purchases involving a mortgage in recent years, following tax changes.