The index showed average yields – the monthly rents investors receive as a percentage of the price paid for the property – rose to 6.3% in January, their highest level since March 2006.

This increase followed a long period of yield stability at around the 6% mark throughout 2007 and 2006. Yields are up this month on the back of rising rents, up 0.2% in January to £11,604, combined with a moderate easing of house prices, down 1.5% to £184,908.

The increase in rents follows a steady upward trend since last summer, with tenants paying on average 8% more for a rental property than they did in September 2007.

Regions with the highest yields include Wales, at 7.5%, and the North and North West, both of which are generating yields of 7.2%.

On an annualised basis, terraced properties have shown the best yield performance, growing 8.6%, followed by detached property and semi-detached property, growing 3.6% and 1.6% respectively. However, the yield generated by flats has fallen by 1.4% over the year to January.

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Paragon’s director of mortgages John Heron says: “Commentators who predicted that the current economic climate would translate into stronger demand for rented homes and higher rents are being proved right. Since September, we have seen one of the strongest periods of rental growth ever. This, together with the easing of house price inflation, has translated into higher yields.

“Many landlords who have been in residential property investment for a considerable time have low levels of gearing – on average 36% – and significant amounts of equity in their portfolios. They know that at times like this, when people are reluctant to commit to home purchase, there is growing tenant demand combined with plenty of opportunities to buy extra rental properties in a less competitive market.”