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Tenant demand has risen by 25 per cent according to one third of landlords surveyed by buy-to-let lender Paragon Mortgages, the sharpest increase since its Trends Survey was introduced in May 2004.

A further 58 per cent of landlords said they felt tenant demand is currently strong and stable, with only 7 per cent reporting a decline in demand. John Heron, director of mortgages for Paragon, said: "Young people are choosing to remain in rented accommodation for longer due to the uncertain housing market outlook, which is definitely placing pressure on the stock of private rented homes available."

He said this shortfall is most sharply felt in London and the south-east, where there is a glut of young professionals which "either cannot afford or do not have the confidence to commit to home purchases". Delayed property purchases due to the credit squeeze has prompted 48 per cent of landlords to expect tenant demand to increase further during the next 12 months.

Mr Heron, said: "Despite much hype to the contrary, professional landlords enter into their investments with a long-term outlook and they will continue to provide homes for these people. New capital gains tax rules and cooling property prices will not deter them from the market while tenant demand is high and strong rental incomes generate attractive returns. Supply as a whole will not weaken but in comparison to demand, it is already under strain. At a difficult time for the market, buy-to-let will play a vital role."