Paragon, Britain’s third-biggest buy-to-let lender, is in danger of being unable to write any new business next year. What is a severe setback for Paragon shareholders – the company has fallen more than 80 per cent in value from this year’s peak – has far larger repercussions for Britain’s wider housing market.

Over the past three years, buy-to-let investors have filled the gap left by the pricing-out of first-time buyers from the property market.

Intense competition in the mortgage market has spawned a plethora of cheap deals, encouraging the stellar growth of the buy-to-let industry. Buy-to-let mortgages accounted for a record 12 per cent of all new mortgage advances in the first half of this year, figures from the Council of Mortgage Lenders show.

At the end of June buy-to-let loans totalled £108 billion, representing 10 per cent of all mortgage balances, up from 3 per cent only five years ago.

This surge in buy-to-let investors is set to come to a halt. If Paragon withdraws from the market, the number of cheap loans on offer will dwindle. Without the same availability of cheap financing and with confidence shaken by the debacles at Northern Rock and Paragon, buyer numbers are likely to shrink.

A drop in buyer numbers would hit house prices. If jitters in the market fuel a sharp rise in forced sellers, just as buyer numbers dwindle, the hit could evolve into a crash. Fears are already growing that this year’s sudden rise in the cost of borrowing is already pushing up the number of housing repossessions by lenders operating in both the prime and sub-prime markets.

Ray Boulger, head of technical services at Charcol, one of Britain’s largest independent mortgage brokers, told The Times he expected price falls of between 10 per cent and 15 per cent for flats in some regional cities over the coming six months.

Mark Clare, chief executive of Barratt Developments, Britain’s second-biggest housebuilder, has singled out Central Manchester and Birmingham as areas most vulnerable to price falls thanks to a massive oversupply of the one and two-bedroom flats popular with buy-to-let investors.

Purchasing activity across the housing market over the autumn is down 25 per cent on the spring, Mr Boulger calculates.

Purchasing activity could fall yet further.

Nigel Terrington, chief executive of Paragon, gave warning yesterday that its buy-to-let gross lending in the October-March period could drop to about £1 billion, half the level of a year earlier, as it scaled back asset growth. Paragon is trying to keep its current sources of finance going as long as possible before having to close to new business.

Bradford & Bingley, Britain’s biggest buy-to-let lender, filled its cash reserves yesterday with an extra £4.2 billion after selling off two hefty loan books. The lender promised to grab more residential mortgage business but only if it was higher-margin.

Andy Wiggans, director of B&B’s mortgage products, said: “A deal like this takes the commercial pressure off us, but it does not mean we will be charging back into the market and taking all the slack up. Do not assume that anyone with money to do lending will pile in there with cheap deals – even someone who has raised four billion quid.”

Buy-to-let landlords with a proven track record – those with six or more properties under their belt for a year or more – are likely to benefit from any tightening in the lending market. They will be the lucky few who are likely to continue to secure good borrowing terms from the lenders. But they are in no hurry to spend. They will be waiting a few months, ready to snap up some bargains in a rapidly cooling market.

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