For many years buy-to-let investors have enjoyed juicy annual returns on the back of low borrowing rates and a boom in UK property prices.

But over the past eight months the outlook for buy-to-let property has shifted from very sunny to decidedly gloomy. First, the growing evidence that house prices are falling means that one vital prop to the buy-to-let property business - the prospect of capital gains to add to rental income - has now been knocked away. Halifax, the UK's biggest mortgage lender, reported this week that UK house prices had fallen by 2.5 per cent in March - the fifth fall in seven months and the biggest monthly drop since Septenmber 1992. Morgan Stanley, the investment bank, reckons that property prices could drop by 20 per cent over the next two years.

Secondly, the impact of the global credit crunch has made lenders in the UK much more wary of advancing money to buy-to-let borrowers unless they are really good credit risks. They have withdrawn many buy-to-let deals and jacked up the interest rates and the size of deposits required on the remaining ones.

David Hollingworth, of L&C Mortgages, the mortgage broker, says: “Until recently it was quite easy to borrow 90 per cent of the value of a buy-to-let property. Now that figure has dropped to 85 per cent. A year ago Nottingham Building Society offered buy-to-let borrowers a good three-year fixed rate of 5.45 per cent with an £895 fee. Today the lowest three-year fixed rate is 5.79 per cent with BM Solutions, but it carries a fee of 2 per cent, which would add £2,000 to a £100,000 loan. Leeds Building Society offers a three-year fix at 6.19 per cent with a £999 fee.”

James Norton, of Evolve Financial Planning, the independent financial adviser, says: “We think that, in general, people have too much of their wealth tied up in property. It's a case of too many eggs in one basket.

“On top of that, we think that now is a particularly bad time to invest because rental yields are so low. In many areas they are about 4 per cent, before management charges. In 1993-94, at the bottom of the last property market crash, yields on buy-to-let properties stood at about 20 per cent, which left plenty of margin for profit even after management charges and loan interest, but that margin has now evaporated.”

However, some people in the property industry remain convinced that buy-to-let still has some steam left in it. Malcolm Harrison, of the Association of Residential Letting Agents (Arla), says: “Most buy-to-let landlords are not overextended with their borrowing. Our latest quarterly survey shows that the average mortgage taken out by landlords is for less than 75 per cent of a property's value.”

He adds that most buy-to-let landlords are long-term investors, typically purchasing a property in their forties and holding it for more than 20 years as an investment for their retirement.

He says: “A high proportion are not too worried about making a net annual profit. They tend to have a reasonable amount of equity in their properties and many have a day job. They are not panicked by short-term ups and downs because they reckon that they can still make a profit in the long term. Even peope who bought at the peak of the property boom in 1990 and suffered a bad few years in the early 1990s are now sitting on substantial profits on their investments.”

Mr Harrison accepts that times are now growing tougher but he thinks that there are still opportunities for property investors. “The key thing is that investors need to do their homework,” he says. “They should check the real rental value of a prospective property and whether this will be enough to cover any loan comfortably. If the sums stack up, then investing in buy-to-let property can still be viable.”

But other experts are less sanguine. Stephen Herring, of BDO Stoy Hayward, the accountant, says: “There is already oversupply of city centre apartments for rent outside London, and with prices for these properties falling, a number of buy-to-letters have already had their fingers burnt.”

He adds that there are two very different factors pushing investors to sell their buy-to-let properties right now. One, which is hitting short-term investors, is the fear that they will not be able to make a quick buck because property prices are falling.

The other is the change in capital gains tax (CGT), which took effect on April 6 and is tempting some long-term investors to sell their properties and pay tax on the profits at the new CGT rate of 18 per cent, rather than the 24 per cent to 40 per cent that higher-rate taxpayers faced until this year.

Mr Herring says: “If even a modest percentage of these people decide to sell, there could be a glut of buy-to-let properties on the market, which would trigger further price falls. There could also be a bit of a queue at the exit because property is an illiquid investment and can take some time to sell.”

Mr Hollingworth adds: “There is no doubt that credit conditions are now tougher and the immediate outlook for property prices is gloomier. Experienced investors who are in buy-to-let for the long term should be able to weather the storm and the more adventurous may even look to add to their portfolios by picking up some properties at lower prices.

“However, would-be investors who were attracted by the prospect of short-term capital gains will be put off by the cooling in property prices. If they hold off for the time being, this will be no bad thing.”

Buy-to-let factfile

- Seven out of ten buy-to-let investors borrow between 71 per cent and 90 per cent of a property's purchase price.

- A quarter of landlords own only one property, 70 per cent own fewer than five and 2 per cent own more than 50.

- Buy-to-let investors expect, on average, to own their properties for 16 years, but a quarter of landlords expect to own them for more than 20 years.

- The average rental yield on UK properties is now 4.6 per cent. Capital appreciation has averaged 8.2 per cent over the past 20 years, though Halifax reports that prices have risen by only 1.1 per cent in the past 12 months. In March property prices fell by 2.5 per cent.

- Only 7 per cent of landlords are currently buying more properties (down from 11 per cent in the previous quarter), while the proportion selling has risen from 16 per cent to 19 per cent.