It is the first quarterly price below 1 per cent since the second quarter of 1998.

The OFHEO believes this slowdown will stop the market crashing later.

'This moderation in the growth of house prices is welcome because continued price jumps like those of the fourth quarter last year would raise the potential for declines later on,' said OFHEO chief economist Patrick Lawler.

Fears of interest rate rises had dampened buying activity, he said.

'Last year's rise in borrowing rates may have stimulated fears of further rate increases, causing some prospective purchasers to move more quickly to buy than they might have otherwise last autumn. That sense of urgency apparently diminished last quarter after rates stabilised. It will be interesting to see what the effects of more recent interest rate increases are in the future.'

The biggest price increases in the past year occurred in Hawaii, Nevada, Rhode Island, the District of Columbia and California. The smallest increases occurred in Utah, Texas, Indiana, Colorado and Alabama. For the first quarter this year, six states - Vermont, Alaska, North Dakota, South Dakota, Iowa, and Nebraska - experienced price falls, compared with no states in the fourth quarter last year.

However, analysts believe this slowdown is too little, too late, because prices have risen 7.71 per cent in the 12 months from the first quarter of last year to the first quarter of this year, well ahead of growth in earnings and consumer prices. The price of other goods and services grew 1.59 per cent over that period. Disposable income rose 5.1 per cent.

Paul Ashworth, international economist at consultancy Capital Economics, said: 'The ratio of house prices to disposable income is above the previous peak reached in the late 1980s, when house price inflation subsequently fell to almost zero, so housing looks dangerously overvalued.

'There is surely a big risk that history will repeat itself, with house price inflation falling to zero and even the possibility of outright falls in house prices this time around. The decline in the rate of increase in house prices in the first quarter is a sign that this slowdown has already begun.'

Rising mortgage interest rates could trigger a sharp slowdown in house price inflation, he said.

'Mortgage interest rates have already risen by nearly 100 basis points, to 6.3 per cent, from 5.3 per cent at the beginning of March, and should rise further once the Fed begins to raise interest rates in the next few months.

Most existing homeowners have the cushion of a fixed-rate mortgage to insulate them against higher rates, but there should nonetheless be a dramatic drop-off in new mortgage business.'

Property was most overvalued in California, Florida, Massachusetts, New Hampshire, New Jersey and New York because these states continued to see robust house price appreciation, he said.