The group representing Britain's social housing industry is in talks with the Government to free £1 billion of public money to help to bail out the new homes market.

The funds would be used to buy tens of thousands of mostly inner-city flats and family homes at a heavy discount from beleaguered housebuilders.

These properties were originally expected to be sold to private buyers but are now part-built or empty as the sector struggles to deal with the sharpest slump in sales for more than a generation.

The proposal from the National Housing Federation (NHF), the umbrella body for the UK's housing associations, is under consideration by ministers at the Treasury and the Department for Communities and Local Government. If the package is agreed, it could kickstart the moribund housing market by buying at least 10,000 units. That would help the big housebuilders, whose share prices have collapsed over recent weeks amid fears that they will be unable to service their debts as cashflow dries up.

The proposals could also assist the Government, whose target to build three million new homes by 2020, including hundreds of thousands of units of social housing, is in tatters.

The package also includes proposals to allow housing associations to buy homes from families in danger of having their property repossessed.

David Orr, chief executive of the NHF, is due to meet Caroline Flint, the Housing Minister, to discuss the funding proposal early next week.

The £1 billion of funding has already been agreed as part of an £8.4billion three-year budget of taxpayers' money set by the Government and ready for gradual allocation to the Housing Corporation, its social housing quango. The funds are in place for spending by housing associations between April 2008 and April 2011, but the sudden collapse in the market since the spring has left housing associations frozen out from about £1billion of this year's expected £2.5billion spend, as housebuilders have simply stopped building homes.

Mr Orr said: “The £1 billion could be used in more innovative way to buy unsold stock, incomplete developments and land - at varying rates of discount.”

Each year about half the country's new social housing stock is built to order by housebuilders as part of their private housing sales sites. Planning approval is granted to builders on sites only if they allocate on average 30 per cent of their stock for affordable and social housing, which is then sold off-plan to housing associations.

However, most of the big housebuilders, including Barratt Developments, Taylor Wimpey and Persimmon, have stopped building on any new sales site over the past few months. The mortgage drought has caused reservations on new homes to fall by between 30 per cent and 50 per cent compared with a year ago.

That move means at a stroke that about 20,000 of the 45,000 flats and houses earmarked for social housing this year will most likely not get built, industry experts predict. Mr Orr wants to use public funds earmarked for buying this supply of social housing, now effectively in limbo, to be used to buy directly from housebuilders tens of thousands of homes built or part-built for private buyers which housebuilders can not currently sell.

Housing starts in total this year are on course to fall to between 100,000 and 110,000 new units, down from about 164,000 housing starts in 2007 and the lowest level since 1945.

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