A fresh surge in property prices and another fall in rents have triggered fears of an imminent collapse in the speculative buy-to-let market.
Thousands of investors have poured into the housing market over the past two years, snapping up homes in order to rent them out and watch the price rise.
People have been encouraged by falling mortgage costs, an uncertain outlook for the stock market and a series of pensions scandals to switch their money into buy-to-let which, in theory, can generate a good income and attractive capital gains.
According to the Council of Mortgage Lenders the number of people taking out a buy-to-let mortgage surged last year by almost 60 per cent to 69,000 from 44,000 in 2000.
"Buy-to-let is where the real bubble is," said Danny Gabay, UK economist at the investment bank JP Morgan. "People have been shipping money into the market – that's the nature of a bubble.
"A lot of properties have been bought as a speculative investment and are flooding into the rental market. That's one of the problems we may find ourselves facing in the second half of the year."
Yesterday Halifax, the UK's largest mortgage lender said the price of the average home rose 0.4 per cent in March, meaning that homes are now 16 per cent more expensive than a year ago.
But according to the Royal Institution of Chartered Surveyors yields for landlords in the residential sector fell in the three months to January, their fifth successive quarterly fall.
Mr Gabay said that as interest rates started to rise – JP Morgan believe they could hit 5 per cent this year – and rents continued to fall, investors would find it harder to pay the mortgage costs. "People are maybe owning two or three properties each. If we get into a downturn then they are in trouble."
This warning is echoed within the industry. The Financial Services Authority is worried borrowers are over-reaching themselves.
John Tiner, its managing director, warned recently of dangers in London and the South-east where the ratio of house prices to incomes is at late-1980s levels and where people are borrowing large multiples of their salaries.
"This exposes investors to growing risk of market under-performance in these regions," he told the Council of Mortgage Lenders (CML).
"Investors should be clear-sighted about the possible difficulties they may face in cashing in their property in the event of a weak market."
According to RICS that weak market may have arrived in London, which together with the South-east, accounts for three-quarters of the market. "A big increase in the number of investors in the buy-to-let market, static rents and lower demand combined to reduce profitability," it said.
It said demand for corporate lets in London, which makes up a third of the capital's market, was "markedly" down, while there was a sharp rise in the supply of properties.
Jeremy Leaf, the head of its residential lettings panel, said: "There is not much profit for landlords in the lettings market at the moment. The increase in availability caused by investors entering the buy-to-let market has had a big impact."
Hamptons International, a leading agent in southern England, said stocks of rental property had surged 40 per cent over the past 12 months while the number of new tenants had grown by just 6 per cent. London rents are down as much as 5 per cent.
The concern for the authorities would be if rental yields continued to fall at a time when mortgage costs were starting to rise – leading to panic among investors struggling to balance the books.
Although the market only makes up about 2 per cent of the total mortgage market – £14.7bn of outstanding loans out of a total pot of £601bn – it is heavily concentrated on the South.
Gary Styles, head of economics at Halifax, said the danger would be that investors rushed to put their properties up for sale to stem the losses.
"I don't think we would need that much of a supply side response to get an adjustment in what is a very thin market," he said.
If the bursting of the buy-to-let bubble undermined prices in London, this could then ripple out into the wider UK market.
The CML played down fears of a collapse. It pointed out that arrears and repossessions for buy-to-lets were running at just half the level of the whole market.
"Buy-to-let is one or two per cent of the mortgage market so it is pretty difficult to isolate what impact that would have on prices," Bernard Clarke, a spokesman, said.
"But it is more a southern phenomenon so there may be some localised areas where it would have more of an impact."
The CML advises investors to see buy-to-let as a long-term investment, perhaps as an extra pension, rather than an opportunity to make a quick buck.
Bob Pannell, its head of research, said it would be sustained by net immigration, family break-ups and the trend for people to carry on renting until later in life.
"Interest in buy-to-let is likely to remain strong," he said. "But as the UK experiences a weaker economy investors will realise the fantastic returns enjoyed in the mid to late 1990s were the exception."
Alex Bannister, the chief economist at Nationwide building society, agreed. "The buy-to-let market does not appear to me to be big enough to knock the market when demand for property is so strong. It might dampen conditions though."
Worries over buy-to-let come against a background of mounting concerns over the levels of mortgage debt generally.
The fall in mortgage rates to their lowest for around half a century have encouraged people to plunge into the market, driving up prices.
Even this is a similar gamble to that taken by buy-to-let investors. Homeowners can no longer reply on double-digit inflation to slowly wipe out the real value of their mortgage debt over its 25-year term.
Instead inflation of about 1 per cent means interest rates will have to remain relatively low and house price inflation relatively strong to prevent homebuyers finding themselves saddled with a debt they can't pay off a couple of decades down the line.Reuse content