It means prices are only 0.7% lower than a year ago, despite the recession and continued mortgage rationing.
Robert Gardner, Nationwide's Chief Economist, said: "UK house prices rose by 1.3% in August, the largest monthly increase since January 2010, reversing the declines recorded in the previous two months.
"Given the difficult economic backdrop, the extent of the rebound in August is a little surprising. However, we should never read too much into one month's data, especially since monthly price changes have been impacted by a number of one-off factors this year, such as the ending of the stamp duty holiday for first time buyers.
"These are factors that cannot be controlled by the usual process of seasonal adjustment.
"Nevertheless, the fact that the annual pace of house price decline moderated to -0.7% in August from -2.6% the previous month provides evidence that conditions remain fairly stable.
"This may be explained by the surprising resilience evident in the UK labour market, with further increases in employment in recent months, even though the UK economy has remained in recession."
Ben Thompson, managing director Legal & General Mortgage Club, said: "This is much needed and timely news for homeowners. This may even serve as a gentle nudge to those currently renting who feel no urgency to buy at the moment.
"With renting on a national basis now more expensive than buying, we would ordinarily expect some tenants to now look to buy.
"Consumer confidence does though remain low and real first time buyer mortgages are harder to get than they used to be, so we are not yet into a normal recovery phase.
"The launch of the Funding for Lending Scheme six weeks ago has triggered some fierce price competition amongst lenders but not yet in the areas that would serve first time buyers well and we need to see competition and product availability in this area.
"Although it is more expensive for lenders to lend at 95%, lending to those with a 5% deposit hasn't suddenly become high risk overnight and there should be more products available in this area.
"If all lenders take steps to serve this market more proactively it would not only help more tenants to buy, it would also enable the market to get going again from the bottom and help the housing market on its slow climb back to a degree of normality. That would benefit lenders too.”
Russell Quirk, director of estate agent eMoov.co.uk, added:"Read nothing more into August's 1.3% rise than low transaction levels. Prices are jumping around from one month to the next and September could just as likely see a reverse.
"In a market as erratic and inconsistent as this, there is some consistency: house prices in the south are proving infinitely more resilient than those in the north.
"There's no doubt that the economic downturn is affecting some areas of the country far more than it is others.
"To say the past is a foreign country is an understatement. From where I'm standing it looks more like a different planet.
"Moving forward, there is certainly going to be much closer correlation between the property market and the economy.
"From now on, the economy will rule the fickle property market with an iron fist.
"The slowdown in the annual pace of decline is one positive, if you're a glass half-full kind of person."
