Demand for houses and flats in the private rented sector will grow more sharply in the next 15 years than any other part of the housing market, says a new report which could encourage buy-to-let investors to increase their portfolios. Jeremy Gates investigates.

The report by City investment bank Merrill Lynch, defines five different types of household - and says that single parents, one person households and other multi-person households' will be forced into private sector rented property as high prices make it impossible for many to buy.

The report states high house prices, student debt, waiting longer tohave children all delay the decision to buy.

Furthermore, the report says these types of household tend to be in social housing - if they graduate from social housing, the next move would be into private rented accommodation.

All these groups will grow significantly in number between now and 2021 - while the number of married couples as a percentage of total households, will fall 5 per cent between 2003 and 2021.

The Merrill Lynch analysis reckons 30 per cent of privately rented properties are held mortgage-free by owners.

This will fall to 25 per cent by 2021, with loan-to-value ratio on buy-to-let properties allowed to exceed the current 85 per cent to enable more people to become landlords.

This trend is already under way; in mid-June, specialist broker Mortgages for Business said several lenders, including Platform Home Loans and The Mortgage Works, introduced loans on investment properties for up to 90 per cent of the value.

With net migration running in excess of 200,000 per year, an earlier report from Hometrack, the housing information business, predicted 600,000 more units in the private rented sector are needed by 2021.

Hometrack says 22 per cent of private sector tenants already receive housing benefit.

However, Malcolm Harrison, spokesman for the Association of Residential Letting Agents (ARLA) said: "There are about 2.5 million homes in the private rented sector, and that total is barely up in the last decade.

"What has happened is a massive refinancing of the sector by a new generation of private investors, and 1.8 million homes are in Assured Shorthold Tenancies allowed by the 1996 Housing Act. Before that, the sector was strangled by successive Rent Acts and sitting tenancies where tenants could stay for ever."

ARLA says the private rented sector will rise from 11 per cent of total households today, to 15 per cent by 2021.

Mr Harrison says that landlords buying properties in today's market tend to be in their 40s, with deposits of around 25 to 30 per cent and expecting to own the properties for 16 to18 years before realising a lump sum for retirement. This is seen as a safer option than pensions, and much more flexible.

He continued: "Average capital appreciation of bricks and mortar over the past 20 years has been 8.8 per cent per year - this figure takes into account the worst housing crash in living memory between 1991 and 1994."

ARLA says rental demand is driven by aspirational' singles and couples in their 20s and 30s who want to live in nicer property and nicer areas which they couldn't afford.

However, Mr Harrison doubts the Merrill Lynch scenario that tenants will move from social housing into the private rented sector.

"It's not happening at present," he says, "but let's hope it does some time in the future."