The head of Britain’s new property super-quango has relaxed its rules governing housing grants to prevent a collapse in the provision of affordable homes in the wake of the credit crunch.

Sir Bob Kerslake, chief executive of the Homes and Communities Agency said he was loosening the criteria for building by housing associations.

The associations, which own half of Britain’s 4m council homes, warned last month there would be a 'catastrophic' collapse in new supply at a time of record waiting lists unless the government intervened urgently. The problem stems from the shift in recent years by social landlords into new forms of funding that have dried up since the credit crunch.

A decade ago these groups built homes using a grant from the Housing Corporation. But they were later encouraged to access cheap debt from banks, and to get more money from the sale of homes to the private sector. As a result, the Housing Corporation – now part of the HCA – began to set a limit of 40% on how much of its grant could be used for developments.

But the two alternative sources of finance have shrivelled in the past few months, prompting fears about the financial health of some associations. The National Housing Federation, which represents associations, has been lobbying the government to abolish the 40% limit, saying that ministers have a choice between fewer new social homes or none.

Financial Times