The latest survey of the rental market by the surveyors’ body RICS suggests that the flood of “couldn’t sell” properties into the lettings market has led to a sharp fall in rents. And the expectations are that rents will fall further.

This rather fits with a recent conversation with an agent who told me in some areas asking rents have fallen 25% – probably from a rather fluffy level earlier though.

Now this is bad news for the established landlords. But some would see this as payback after they enjoyed the flip side of this phenomenon which saw rents rise last year when would-be buyers flooded into rental instead of buying.

The important point though is that what we have today is the rental market playing a very critical role in how the housing market readjusts and how prices move.

This was not really the case in the house price collapse of the early 1990s when we had homes flooding onto the sales market which drove down prices.

This time around the combination of an established buy-to-let market and the sharp drop in interest rates has meant that would-be sellers have an option – let the property out and wait for the market recovery.

It may be that some of these new landlords are more than covering their costs. It may be some are making small losses. Some may be making losses, whether they are aware of it or not. Some may be holding onto one house they couldn’t sell and renting another – therefore holding a fairly neutral position.

However the sums pan out for each of these landlords, if they are in the rental market for the short term they are gambling on capital values rising.

This clearly is a rather bold gamble given the consensus of experts puts the likely fall in price from where we are now at about 10%. And there are some pretty apocalyptic estimates of where prices may end up.

But what is perhaps of more interest, certainly from a policy perspective, is how this shift to letting rather than renting plays within the market.

On the face of it, it appears to provide a useful break against distressed selling and an otherwise more sudden deep collapse in prices. That could be regarded as useful.

But what we are seeing now is the erosion of the rental market in terms of price. The effect here is two-fold. Firstly, at the margin, it begins to favour the decision to sell over the decision to let, thus putting downward pressure on sale prices.

Secondly, it undermines the existing buy-to-let market by driving down rents. This market as we know is under pressure anyway (although less with the reduction in mortgage rates), so the flood of extra rental properties may threaten more players than would otherwise be the case.

Logically the effect should be to increase the likelihood of repossessions in the buy-to-let market, which again would tend to lower sale prices, certainly in the eyes of investors looking at rental yields.

But there is a more worrying threat. What if we are about to witness a surge in “distressed tenants” who cannot afford to pay their rent as a result of, say, unemployment?

This may have three main effects. Firstly some rent could be lost through the delay or non-payment by the tenant, depending on how vigilant the landlord is in collection. Secondly the level of voids would most likely rise in the process of finding new tenants. Thirdly with asking prices falling the new tenants may expect to pay less than was previously acheived.

Either way the result could be downward pressure on rental yields, which in turn may lead some to exit the market or disuade others from entering. This, in turn, would put further downward pressure on house prices.

So, it may be that the trend to defer sales by letting properties has slowed the housing market correction and helped to avoid an otherwise nastier collapse. However, it may also be that it is merely deferring the full impact of the correction in house prices – unless, of course, there is a swift recovery in both the housing market and the economy at large.