Investment house Skandia today declared that the buy-to-let boom is firmly over as falling house prices and higher mortgage costs prompt investors to flee the market.

The rush to sell will drag the housing market further into the abyss as a glut of properties becomes available at a time when would-be buyers cannot raise funds to act.

Buy-to-let has exploded in the past decade with mortgage borrowing to fund investments soaring from £2 billion in 1998 to £120 billion at the end of 2007.

But the credit crunch has seen the number of buy-to-let mortgages on offer plunge 85% from 3478 to just 528 since last August, says Moneyfacts. Skandia today said it expected the buy-to-let market to shrink by two thirds in the next five years, leaving £44 billion of mortgages outstanding.

The grim assessment came as buytolet lender Bradford & Bingley admitted that the majority of its shareholders snubbed its controversial £400 million emergency rights issue.

Nick Poyntz-Wright, chief executive of Skandia UK, part of insurance giant Old Mutual, said: "Private investors have accumulated significant amounts of equity in buytolet properties after a long period of strong growth in home and flat values.

"Higher mortgage rates and falling property prices will cause investors to reconsider their exposure to residential property, and many will choose a more diversified approach.

"With inflation rising, investors realise the need for strategies that preserve their wealth. Asset diversification, as well as taking advantage of efficient tax wrappers, is an essential ingredient of any investment strategy whatever the individual's risk appetite may be."

Melanie Bien of mortgage broker Savills Private Finance said: "Lending criteria have tightened across the buy-to-let sector. Compared with only a year ago, lenders need a bigger deposit, around 25%, and tighter rental cover requirements will cut many investors out of the picture."