Michael Howard, Secretary of State for the Environment, wants extra funds to be made available through the Housing Corporation for builders to provide new homes to rent or carry out conversions for letting at market rents, a ministerial source said.
The aim is to subsidise people who wish to rent by giving money to the building sector, which is suffering a slump and has been lobbying hard for the Government to help to lift it out of recession. Builders are loath to build or convert properties which are difficult to sell, and they cannot make a profit through letting.
The scheme would encourage renting and fulfil the Tory long-term hope of allowing the workforce to become more mobile. It may also help to provide more accommodation for the homeless, currently housed in bed and breakfast establishments by local authorities.
It will mark a further shift of resources from council housing, which the Government has been passing to housing associations, and is certain to cause outrage among Labour MPs and councillors.
Mr Howard will be bidding for the money in the annual review of public expenditure which is already under way. He will argue that the Government should not end the Business Expansion Scheme - offering tax relief at 40 per cent to investors for letting residential property - this year without putting something in its place.
But the new scheme will be seen by the Government's critics as an admission that the 1988 Housing Act failed to work. In spite of the increase in homes to let during the recession, ministers privately believe more could be done to provide rented accommodation.
Many young people still believe it is better to buy than rent, in spite of the losses during the recession and the fact that more than 1 million home owners are faced with negative equity - mortgages that are greater than the value of their homes.
Ministers have been considering offering a tax discount, similar to mortgage tax relief, for those renting property at market rents. But it is believed Mr Howard has decided to press the Treasury for new funds to allow private firms to bid for money to use in building or converting property to let at market rents.
The money would be distributed by the Housing Corporation, which acts as the umbrella organisation for the housing associations with a budget of pounds 1.7bn. Tory MPs are backing the plan, and are likely to urge the Commons environment select committee to produce a similar proposal after its current inquiry into the Housing Corporation's operation.
The 1988 Housing Act was a compromise, which fell short of the demands by Tory right-wingers for all the protection for tenants under the Rent Act to be abolished. It did not remove restrictions on the rents set for existing tenancies, but it freed up the market for new homes to rent.
Tenants who are not able to afford the market rent can claim housing benefit provided they are not in accommodation that is regarded as too big for their needs.
The Tory election campaign guide said: 'The Conservative approach is to encourage landlords to rent out their property by allowing them to set rents which are economic, and by allowing them, in agreement with their tenants, to repossess their property after a fixed time, settled beforehand, has expired.'