Around £18 billion of cash will be pulled out of the buy-to-let market in the next few years, further destabilising the housing market, according to a new study.

The research, by the financial services firm Skandia, suggests that landlords will be driven from property investment by falling house prices, higher mortgage rates and sluggish rental growth.

It forecasts that the stock of buy-to-let mortgages will collapse to £44 billion from £120 billion at the end of 2007. Assuming the average loan-to-value ratio of 80 per cent that would be sufficient to release £18 billion of cash tied up in property investments.

Nick Poyntz-Wright, chief executive of Skandia UK said: “Higher mortgage rates and falling property prices will cause investors to reconsider their exposure to residential property.”

UK house prices have tumbled more than 11 per cent to an average £177,351 since last August's peak, based on the Halifax index, after a decade of booming prices that added 145 per cent to the average home's value. A mass sell off by buy-to-let investors would send prices spiralling even lower.

However, other experts dispute the notion that there will be an exodus out of buy-to-let.

Melanie Bien at broker Savills Private Finance, says: “Property is a long-term investment so to suggest that investors will now start selling up because prices have fallen over the past year after years of house-price growth is madness. With prices falling, now is not a good time to sell. The best thing landlords can do is sit tight - and the vast majority will do exactly that. The housing market will recover and some normality will resume in time."

Demand for rental property has been increasing as people either delay buying somewhere new or are unable to obtain a mortgage. This has enabled landlords to increase rents over the past three months, according to the Royal Institution of Chartered Surveyors (Rics). Tenant demand has been rising at its fastest rate since 1998, with 37 per cent more chartered surveyors reporting an increase in lettings in the three months to July, up from 30 per cent during the previous quarter.

Vincenzo Rampulla of the National Landlords Association (NLA) said: “With rental incomes stable in June and 9.3 per cent up on the previous year, it is hard to justify the Skandia figures. Whilst some buy-to-let investors will have entered the market in more benign times hoping to make a quick fortune, others will have been looking to make prudent long-term investments."

However, the environment could be about to get tougher. Rics has warned that the downturn is forcing increasing number of homeowners to rent out their property because they are unable to sell. As the supply of rental properties increase it expects rents to fall slightly during the next three months.