The days in which anyone could make a killing in property investment are over. With net income yields as low as 3.2 per cent, and house prices in many areas starting to fall, the arguments for purchasing property as an investment look weaker than they have at any time in the past decade. But although we are likely to see an end to the rapid expansion of the buy-to-let sector, a large-scale sell-off by existing buy-to-let landlords is equally unlikely: research from Savills shows that only 5 per cent of investors are seeking to reduce their property holdings.

Those who stay the course are in for a rocky ride. Over the course of 2007, the outlook for buy-to-let investors deteriorated, gradually at first and then more sharply with the advent of the credit crunch in the summer. Three interest-rate rises, offset by one rate cut in December, increased the cost of borrowing by half a percentage point, while the reluctance of banks to lend to each other has made mortgages even more expensive, as well as being harder to come by. Those lenders following the Northern Rock funding model, such as Paragon Mortgages, have found money increasingly difficult to raise, and have all but ceased to make new loans. Over the past few months, house prices across the country have begun to falter as the volume of transactions has collapsed.

Amateur buy-to-let investors, particularly those who have purchased properties recently, are particularly vulnerable to the downturn - and none more so than those landlords who have bought new-build flats in city centres, where in many cases supply exceeds demand significantly. Figures from Savills show that new-build flats form a significant part of more than 60 per cent of entrants to the market over the past six years. For these investors, 2008 is likely to be a difficult year. According to the Royal Institution of Chartered Surveyors (RICS), the sector of the market most vulnerable to a downturn is “commodity new-build flats” - small properties without character that are in oversupply. The RICS also believes that prime Central London properties will continue to lose value if City bonuses are low this year.

Naomi Heaton, chief executive of London Central Property, the property investment company, says: “The alarming coverage of the credit crunch and the uncertainty surrounding the Government's tax treatment of non-domiciles may create nervousness among investors.” However, she argues that there is almost no land with development potential available in the centre of the capital, so pressure on supply will continue.

A downturn in prices is not the only problem that landlords face. Despite interest rates being forecast to fall by at least half a percentage point in 2008, it is unlikely that buy-to-let mortgages will get much cheaper. Jonathan Moore, of Mortgages for Business, the specialist buy-to-let broker, says: “The availability of competitive mortgage funding will become an increasing issue in 2008, as securitised lenders who have previously sought funding from the City find new finance either harder to come by or priced at a higher level.” He believes that investors may have to resign themselves to paying higher arrangement fees on mortgages.

Although tales of amateur investors in trouble are now commonplace, the majority of professional landlords are refusing to panic. In fact, a recent report from Bradford & Bingley showed that 86 per cent of landlords plan either to increase their portfolios or to leave them untouched in 2008. According to Jeremy Law, head of buy-to-let at Bradford & Bingley: “Landlords' views are the most authoritative in the industry, as they are expressed by those who are at the coalface of the buy-to-let market. These are the people who are taking out the mortgages, buying and maintaining the properties and managing the tenants.” Moreover, larger professional landlords may well be able to take advantage of the amateurs' difficulties by snapping up bargains from distressed sellers. “The new year will be a great time for buyers to capitalise on a weaker market,” says Robert Bryant-Pearson, chief executive of Allied Surveyors.

Research from Savills shows that investors are most likely to react to the deteriorating investment climate not by disposing of assets but by concentrating their efforts on maximising income, for example by seeking to reduce management costs. And there is already evidence that many investors are taking a more cautious approach. Figures from Hamptons Mortgages show that in November the proportion of buy-to-let loans taken out to fund purchases fell by more than a quarter. Moreover, some have already taken profits. An RICS survey has shown that landlord sales were at their highest level for two years during the second quarter of this year.

Those investors who remain in the market will no longer be able to count on strong capital growth to boost yields. Most commentators now predict zero house-price inflation for 2008, which will probably mean a slight fall in prices. Housing market bears, such as the research group Capital Economics, are more pessimistic, predicting falls of 3 per cent in 2008 and in 2009.

There is some good news, however. Figures from Paragon show that strong tenant demand pushed average rents to a record high of more than £11,000 in October, up 10 per cent on the same month in 2006. Total annual returns for the year to October were 15.5 per cent, Paragon says. Moreover, rents are forecast to continue rising as net immigration and the rising number of one-person households continue to put pressure on the supply of housing. Even more important is the decline in the number of first-time buyers. Halifax figures show that there were fewer first timers purchasing property in 2007 than at any time since 1980.

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