Town halls face losing significant powers over the future of their high streets under Whitehall plans to allow shops to be converted into homes without planning permission.

In a move that signifies the widening acceptance that changing shopping habits and the economic downturn have sent the British high street into rapid retreat, the planning minister, Nick Boles, will this week propose scrapping existing rules protecting shop units, including banks and building societies, and allowing them to become housing.

He wants owners to have "permitted development rights" to make the transformation, in the same way that the government has allowed residents to build extensions of up to eight metres without applying for planning permission.

Local authorities will be asked to decide which shops should be considered "prime retail frontage" while the rest could be scrapped. There are around 7,000 empty shops in London alone and last year one senior retailer, Phil Wrigley, chairman of Majestic wine, admitted the high street was in "a death spiral".

Boles said: "People's shopping habits are changing very fast as a result of the rise in internet shopping and changes in lifestyles and working patterns. We need to think creatively about how to help town centres thrive in this new era. We want to encourage local councils to concentrate retail activity into the prime shopping streets in the heart of their town centres and adopt a more relaxed approach to under-used retail frontages."

The Department for Communities and Local Government said the policy was aimed at allowing new housing in side streets and edges of town centres where retail space is no longer viable. It believes the increase in residents near the remaining "prime" retail space will increase customer numbers and bring life back into town centres.

The move is set to be strongly resisted by councils who believe they must retain strategic control over their shopping parades. Councils argue that they already take into account the changing dynamic of their high streets when they are drawing up plans and argue it is part of the democratic process that they are able to set the priorities for their neighbourhoods in a strategic way rather than leaving the future shape of shopping areas to the market-led decisions of landlords who stand to make larger rents from housing than empty shops. They say that high streets can recover as the economy regains momentum, but if properties are converted into homes it will be very difficult to ever change them back.

"Central government is a poor place to make policy that affects local communities," said Dale Atkinson, spokesman for the Local Government Association, which stressed it had yet to see the detail of the government's proposals. "It is local residents that should make decisions about how their neighbourhoods look and feel. The character and amenity of a neighbourhood should be negotiated locally."

Mary Portas, the fashion retail expert who led a government review aimed at breathing new life into the nation's ailing high streets, this weekend warned councils not to take the easy option of turning empty shops into homes.

"People do still want their high street as a community place, a meeting place," she told the Sunday Times. "If we lose that, it is going to be one of the greatest social crimes in our country. I believe we need to look at alternative ways of using them and part of this will have to be other things apart from retail – schools, health, wellbeing centres, meeting places to give the social infrastructure of communities. Part of that will be housing."

A report by London Councils last week warned that shuttered frontages "can cause a 'negative feedback loop' which means they discourage investment, decrease the offer on the high streets, keep consumers from visiting and contribute to a general sense of decline and neglect".

However, it added: "High streets are social places that give a sense of belonging; their loss could lead to social problems."