The housing market in Britain suffered its worst year in a decade in 2005 but signs are growing that conditions are picking up after a sharp slowdown, data from the Nationwide building society showed yesterday.

The mortgage lender said house prices rose by 0.5 per cent in December, lifting the annual rate to three per cent from 2.4 per cent in November.

That was still the weakest full-year performance since 1995 and follows several years of double-digit gains as a series of interest rate hikes took the wind out of the booming market.

But economists said fears of a housing crash so widespread just a year ago look to have been unfounded as evidence builds that the market is gently recovering though a return to boom conditions seemed very unlikely.

"While there is uncertainty about the economy at present we still expect the next move in interest rates will be down and that this is likely early in 2006," said Fionnuala Earley, economist at Nationwide. "But while the market responded quite swiftly to the rate cut in August, we do not expect a cut to cause annual house price inflation to accelerate back up to levels seen in early 2005."

Nationwide is predicting house price rises of between zero and three per cent in 2006.

Economists said the market was unlikely to tolerate any rises beyond that as affordability still remained a key constraint for many buyers.

"If house prices start to accelerate markedly, we believe buyer interest will diminish, thereby keeping a lid on prices," said Howard Archer, economist at Global Insight.

Nationwide said the average home cost £157,250 in December, or up around £13 a day over 2005. That compared with gains of almost £50 a day last year.

It also noted that this year was the first since 1999 that equity market increases had outstripped house price inflation.

"The FTSE-100 grew by 16 per cent in 2005, compared to housing market growth of three per cent. But the FTSE still remains 10 per cent below its 1999 level, whereas house prices are more than twice as high as than at the end of 1999," Mr Earley said.