Investors who dived into the housing market and then rented out the properties made average returns of 16.3% last year, new figures show.

Birmingham Midshires said this is an increase on the 13.5% recorded in 2006, although neither number includes the cost of fees and mortgage interest.

The increase in returns is being put down to a 10.7% jump in house prices during the year, which left an average investment property at £154,795.

But most of the gains were seen during the first six months, with the buy-to-let market under pressure in the second half of the year due to previous rises in interest rates.

House prices only edged upwards by 1.6% during the final quarter of the year, and experts believe the slowdown will continue throughout 2008, putting the squeeze further on property investors.

Landlords in Northern Ireland saw the strongest gains, making average returns of 44%, ahead of Greater London which saw the second highest growth of 15.8%.

But the startling rise is mostly down to rocketing house prices in the province after values surged by around 39% during 2007.

The South West and the South East were the only other places to experience double-digit growth, while in the East Midlands the price of investment property crept ahead by just 5.7%. But despite this, even investors there still saw returns of 11%.

People renting in Scotland saw the biggest jump in costs, with rents increasing by nearly 23%, while there were also strong rises in the North at 18.2%, and in Greater London at 15.4%.

Despite this, the North is still the cheapest place to rent at around £494 a month - the only region in the UK where average monthly rents are below £500.

Tim Hague, managing director of Birmingham Midshires Mortgages, said: "The fundamentals underpinning the buy-to-let sector are sound.

"They include strong demand from higher immigration levels and housing affordability concerns for first-time buyers.

"However, we expect house price growth to be more subdued in 2008, largely reflecting the impact of higher interest rates."

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