David Prosser's Outlook: The buy-to-let chickens come home to roost

Talking of unsustainable asset price bubbles, have buy-to-let investors found a way to complete a virtuous circle? The buoyancy of the buy-to-let market played a significant role in Britain's house-price boom, so are landlords concerned that prices are falling? Not particularly, is the answer according to the Council of Mortgage Lenders. Absolute prices may have come down, but so too has the availability of mortgage finance and there has not been a fall in the affordability of house purchases, once you take into account the larger deposits required by lenders. As a result, demand for rental property has never been higher.

Nor, says the CML, is there any real evidence that the buy-to-let market has so far been any more seriously affected by the credit crunch than other parts of the housing sector. Figures released yesterday by lenders show arrears remain at lower levels in the buy-to-let sector and that repossessions are no more common.

Lucky old buy-to-let investors then? Well, not entirely. It's true that the demand for rental property has increased this year. But so too has the supply. Many of those who are finding it impossible to sell their homes are renting them out. In areas of the country, particularly in saturated parts of the market such as flats, supply is rising faster than demand. As a result, rents are falling.

Moreover, landlords are suffering those falling rents just as their mortgage costs are increasing. Those who took out two- or three-year fixed-rate deals now coming to maturity must expect to have to remortgage on to much more expensive deals. Interest rates have risen and competition for business is no longer so fierce.

The squeeze does not end there. It's not difficult to work out what to do with an investment that is no longer producing a return with which you can be satisfied – you get rid of it. But buy-to-let investors wanting – or, worse, needing – to offload their properties are rapidly discovering why people warned them that property could be an illiquid market.

The CML's upbeat tone yesterday was for these reasons rather complacent. The group was right to contrast low absolute arrears in the buy-to-let market with higher figures elsewhere, but the truth is that, from a lower base, bad debt is now rising more quickly in this sector. In time, that will translate into a spike in repossessions too.