Two large purple signs stand outside a half-built block of flats off Caledonian Road in King’s Cross. “Twenty new council homes are coming”, they announce. “All new homes offered to local residents first … High quality homes for council rent.”

James Murray, 31, executive member for housing and development at Islington council, looks up at the four-storey site on the edge of the sprawling Bemerton estate and admits his signs may be telling a lie. It looks as if the speculators and landlords will be moving in instead.

During the general election campaign, the Conservatives offered 1.3 million tenants of housing association houses and flats the chance to buy their homes at a discount as part of David Cameron’s pitch that he could deliver “the good life” for voters. The pledge went down well on the doorsteps, and in theory the extension of the popular Thatcher right-to-buy policy was cost-free.

But Murray and others see a heavy price looming. Local authorities in inner London now believe they will have to sell every new council home they build, as soon as they are ready, to finance the general election give-away. It could, they say, be the death knell of the council home.

Funding for discounts for housing association tenants wanting to buy their homes is due to come through forcing local authorities to sell their most expensive properties.

The expected bounty from the sale of such high value homes is also supposed to finance the building of replacement properties to meet a desperate need for affordable accommodation.

“But the problem is that they haven’t thought it through,” says Murray. “We had a carefully crafted plan. These flats are designed for those aged over 55, and the idea is that those who want to downsize from family council properties can do so. It is on the edge of the estate, so people don’t need to move away from where they have lived. The bedroom tax doesn’t apply after you retire, but people moving in at 55 would also have got a few years of avoiding that if they moved in here out of their larger homes.

“But it looks like we will have to sell the flats when they are completed in September. Each of them would sell on the open market at £485,000. And because they are new they are within the third most expensive properties that we have. In fact, all new council homes in inner London will have to be sold off. And what incentive will we have to build again?”

The landlords and property speculators will be circulating, and this is only the latest twist in a sorry saga. The extension of the Thatcherite right-to-buy to housing associations was controversial from the moment it was announced. After the election, the former permanent secretary at the Department for Communities and Local Government, Lord Kerslake, now the chair of the Peabody Housing Association, denounced the policy as “wrong in principle and practice”.

Kerslake, along with others, could not understand how giving housing association tenants the ability to buy their homes, and taking properties out of the affordable housing stock, would solve the problem of nearly 100,000 people living in temporary accommodation because they cannot afford to rent privately.

The original right-to-buy policy, reinvigorated with larger discounts for council home tenants under the coalition, has seen a huge increase in sales of properties in recent years. The latest statistics, published last week, show that total sales in 2014-15 were 12,304. The number of replacement properties sourced or built in the same financial year was 1,903.

Henry Gregg, assistant director of communications and campaigns at the National Housing Federation, questions whether it was legitimate to bring in a new policy, given its frailties. “These figures show that the promise to replace homes sold through right-to-buy, one-for-one, simply isn’t happening. At a time when we need to be increasing the overall supply of social housing, it is like trying to fill a bathtub with the plug taken out.”

Mark Field, the Conservative MP for Cities of London and Westminster, is now calling for a rethink: “It is a policy that arose during the general election. There are some iniquities that need to be ironed out.”

Emma Reynolds, the shadow communities secretary, said: “There is a clear risk that the government’s new proposals will make the crisis even worse.”