This is the weakest annual pace since November 2013 and compares with an annual growth of 4.7 per cent in July.
The average value of all properties across the UK – now £184,682 – was up 0.5 per cent on the previous month when they rose by 1.7 per cent.
London recorded the biggest monthly rise of 1.7 per cent in August, taking the average price of property in the capital at £493,026.
That compares with the average for England and Wales of £184,682. The east of England posted the biggest annual rise of 8.4 per cent, followed by the south east at 7.6 per cent.
Land Registry’s data runs slightly behind because it is based on completed transactions as opposed to asking prices.
It showed the number of completed house sales in England & Wales decreased by 13 per cent over the last year to 70,404 compared with 80,823 in June 2014.
IHS Global economist Howard Archer said he expects to see housing market activity improve further after recent figures from the British Bankers Association showed that mortgage approvals reached an 18-month high in August.
“We expect house prices to see solid increases over the coming months amid firm activity. Given that house prices were soft through the latter months of 2014, this is likely to see annual house price inflation move higher over the coming months,” he said.
John Eastgate, sales and marketing director of OneSavings Bank, said: “House prices are still rising, however it is encouraging to see some moderation in the rate of growth, with this being the slowest annual increase for two years, a statistic that will no doubt be well received by prospective buyers. With wage inflation now at a six year high, more moderate house price growth bodes well for the long-term health of the property market, and it should help reduce some upwards pressure on affordability.
“We should, however, avoid focusing too much on the short term. This month’s figures might show that price growth has slowed, but the fundamentals are such that growth is inevitable over the long-term," he added.