The £400m scheme, to be announced today by communities secretary Eric Pickles according to The Times, will allow younger people who do not own a home to live in a new-build rental property with rental payments fixed for seven years at 80 per cent of the market value. At the end of that period, they will then have first refusal on the property.

Most of the properties involved will be one or two-bed flats and houses.

The scheme is aimed at single people earning up to £33,000 or couples on £66,000 a year or less, although it will not be means tested.

Pickles said: “The government is standing by people who work hard and do the right thing, and helping them move up and on in life.”

Local housing associations will be able to set their own exact criteria but be expected to stick to centralised guidelines. They will be asked to bid for low-cost loans which can be used exclusively to build new homes to take part in this scheme. The government believes 10,000 new homes can be built using its £400m allocation by 2017.

Housing associations will be given up to 16 years to repay the loans, and where properties are sold to tenants after seven years, the proceeds must be used to build more homes. If a tenant is not in a position to buy their home after seven years, they have to move out and rent or buy on the open market.

Half the money will be directed at the London market, where property prices have increased by more than 11 per cent in the last year.