House prices are 5.3% lower than in August last year in the biggest annual decline since 2009, according to Nationwide.
The building society said the fall represented a fall of £14,600 on a typical UK home since house prices peaked in August 2022.
The building society said higher borrowing costs for buyers had led to a slowdown in activity in the housing market.
Mortgage approvals are also around 20% below pre-Covid levels.
Since December 2021, the Bank of England has raised interest rates 14 times in a row in an attempt to curb rising consumer prices in the UK. The bank's base rate now stands at 5.25%.
This, in turn, has caused lenders to raise their mortgage rates, putting increasing pressure on home buyers.
Chief economist Robert Gardner said rising borrowing costs meant the fall in average house prices was "not surprising".
He told the BBC that home affordability was "much more stretched than it used to be" indicating that a typical rate is now around 6% compared to 1.5% at the end of 2021.
"Clearly this has had a huge impact on the market as a whole," he added. "I think it will take time for things to improve at all."
According to financial information service Moneyfacts, the average two-year fixed mortgage rate on Friday was 6.7%, while the average five-year fixed was 6.19%.
Average UK house prices peaked at £273,751 in August 2022, but fell to £259,153 last month.
While the fall is the biggest since 2009, property prices are still much higher than they were in August 2021 when the average was £248,857.
Nationwide is one of the largest mortgage lenders in the country. But the building society's figures only take into account buyers with mortgages and do not include those buying homes with cash or buy-to-let deals.
According to property website Zoopla, people with mortgages currently account for 60% of all home sales, compared to 31.8% of cash buyers and 8.2% of buy-to-let purchases.