At the end of Granby Street in Liverpool’s Toxteth, past relentless rows of tinned-up houses punctuated by half-demolished corner shops, the mood is unusually festive. Television crews have been here for the past few days, camping out amid the jungle of pavement plant pots and poking their cameras into tumble-down terraces. But for once they haven’t come to report on the sorry story of urban dereliction that has plagued these streets for the past 30 years. It’s not the usual social affairs correspondents, but packs of bewildered cultural critics – because this is the street that’s been shortlisted for the Turner prize.

“Our first reaction was a sort of surreal amazement,” says Ronnie Hughes, a member of the Granby Four Streets community land trust, which is now at the centre of the art world’s attention for the way residents have been taking the future of their streets into their own hands. “But then again, the community has had practice at this. It’s the same way that Liverpool reacted to becoming Capital of Culture in 2008: there was dancing in the streets because we’d won something, rather than particularly knowing or caring what it was we’d won.”

Most locals might still be in a state of baffled amusement that the DIY handiwork of a young London-based architecture collective, Assemble, in doing up some of the area’s empty homes has been shortlisted for the country’s most prestigious art award. But the members of Assemble are at an equal loss for words – mainly because they’re far too busy for the news to have sunken in. There is work to be done.

In the back yard of one of the houses, a couple of the group are pouring pigmented concrete to make a series of fireplace surrounds, beautifully cast in moulds made of debris collected from one of the derelict properties. Indoors, others are convening a meeting with future residents to present options for their new floors and front doors, around a group of intricately crafted doll’s house-sized models.

“Assemble are the only ones who have ever sat and listened to the residents, and then translated their vision into drawings and models, and now into reality,” says Erika Rushton, chair of the community land trust that has been working with the designers during the last couple of years to bring these neglected houses back to life.

It is a moment that has been sorely awaited. Since the 1981 riots, which saw buildings torched and 500 people arrested, Toxteth has suffered from decades of “managed decline”, with life inexorably drained from its streets. Eleanor Lee has lived here since 1976 and seen most of her neighbours leave.

Plans for Assemble’s renovation of the Granby Four Streets area of Toxteth in Liverpool

“After the riots, an invisible red line was drawn around the area,” she told me when I first visited the area in November last year. “It was an unspoken policy of no maintenance and no investment. Once houses are boarded up, it sends a signal.” Bins weren’t collected, streets weren’t swept, and Granby became a no-go area.

There are now just 70 residents clinging on in an area of 200 homes, a post-apocalyptic statistic that is the result not of some great environmental disaster or mass industrial collapse, but of a series of failed regeneration plans. New Labour’s Housing Market Renewal Pathfinders is one of the most recent of such schemes that have systematically eviscerated the communities here to make way for promised visions that never arrive.

“Everyone just offered a total solution,” says Rushton. “Every house would be done, with no recognition of what people have crafted into their individual homes, or the value that people had invested in the street with planting and building furniture.

“Regeneration is always this blunt, abstract, over-professionalised thing,” she adds. “But Assemble have shown how it can be done differently, by making things that people can see, touch, understand and put together for themselves.”

After attracting funding from a Jersey-based social investor, Steinbeck Studio, which also brought Assemble on board, the community land trust formalised its plans and took control of 10 empty properties from the council last year. They are midway through being refurbished to Assemble’s designs, with the help of local apprentices, in a strategy that makes the most of what is already there, celebrating the generous ceiling heights and big windows of the existing structures, in comparison to the mean-minded hutches that have been built in the tabula rasa approach nearby.

“We want to celebrate the idiosyncrasies of the existing derelict buildings,” says Assemble’s Lewis Jones. “If a floor is missing, why not leave it out and have a double-height space? There isn’t the usual pressure to extract the maximum possible value from the site and put profit before people.”

As part of a second phase of work, Assemble has imagined a spectacular winter garden within the empty brick shell of a gutted house – an idea that might form part of their installation for the Turner show at the Tramway in Glasgow later this year.

“I just love their attitude,” says Lee. “They are so bold and fearless in their designs, and their vision for housing isn’t limited to the usual cream-coloured boxes. They are architects working truly as artists.”

The Cineroleum … Assemble’s first project converted an abandoned petrol station into a temporary cinema.

For Assemble themselves – all still in their mid-20s, and not one of them even yet qualified as an architect – the nomination has come as a bit of a shock. When they first got together as a group of recent graduates to build a temporary cinema in an abandoned petrol station in Clerkenwell in 2010, they can have had little idea that, just five years later, they would be shortlisted for the Turner prize. But not much about the dazzling trajectory of this loosely assembled collective of designers and makers was ever really planned.

The 18-strong group has since gone on to build a portfolio spanning everything from temporary theatre structures and artists’ studio spaces to community housing strategies and new town squares – as well as staging a mysterious ritual happening at the Serpentine Pavilion last summer. They might not be qualified architects, but that wasn’t much of an obstacle to them landing a £2m competition to build a new art gallery for Goldsmiths College last year, or to building an adventure playground in Glasgow, or to proposing a revolutionary new housing strategy for Liverpool.

The diversity of Assemble’s work is matched only by their ability to make things happen in unlikely circumstances, where the usual necessities of a client, site or budget might not be in ready supply. The Cineroleum in Clerkenwell came about, they said, from a collective desire to build something; the result exuded their pleasure in the process of making, a feeling that has infused their work ever since. Sheets of Tyvek, the foil-like waterproof building material, were turned into walls of sumptuous, silvery swagged curtains, hoisted in a dramatic reveal at the end of each screening to leave the audience exposed on the edge of a busy main road. Formica was used to make intricate marquetry tops for tables and stools, while plastic tiles were vacuum-formed on site (using a jury-rigged hot air gun and a vacuum cleaner) to transform the ceiling of the former garage shop into something special. The building process was as much a performance as the final event itself.

Assemble have never claimed to be artists – and their shortlisting has no doubt raised some eyebrows in the rarified realms of the gallery world – but in both their approach to materials and the collaborative process by which their projects are made, their work transcends the norms of conventional architectural practice.

Folly for a Flyover … their second temporary events space was conceived as a little house trapped beneath a motorway.

A year after the Cineroleum, they built a second temporary events space under a motorway flyover in east London, commissioned by arts organisation Create, its pitched roof poking up between the roaring lanes of traffic like a fairytale cottage that had lost its way. Made of wooden bricks sawn from railway sleepers and hung like drapery over a scaffolding frame, it was built by an army of 200 volunteers and provided a surreal theatrical setting for films, talks and children’s play sessions. Its bricks went on to be reused to make planters for a local primary school.

The more interest they received in their talents, the more the group began to coalesce as a formalised practice. These initial projects caught the eye of the London Legacy Development Corporation, the agency charged with co-ordinating the spoils of the Olympics, who offered them a warehouse space in Stratford on a peppercorn rent, while it awaits development by Ikea’s property arm. With a fully equipped wood shop, welding facilities, ping-pong table – and a kitchen where they take turns to cook lunch each day – it is a lively laboratory for testing their ideas at full scale, and developing new hybrid materials with an almost alchemical sensibility. There are chunks of “papercrete”, which they used to make tables for a British Council exhibition, samples of “rubble-dash” render for a little performance temple for OTO Projects, along with sliced tree-trunk furniture and sheets of pummelled metal that look like battered steel drums – a cladding test for another forthcoming project.

Yardhouse under construction … erected with the collective spirit of an Amish barn-raising.

Across the yard, the LLDC has since commissioned Assemble to build an affordable workspace building, the Yardhouse, which exhibits a similar level of care and fun as their temporary venues, elevating cheap materials into something refined. It is a basic timber-framed shed – once again erected with the collective spirit of an Amish barn-raising – full of spaces for like-minded makers, arranged around a processional staircase, with elegantly welded chandelier light-fittings. It is wrapped with a candy-coloured facade of hand-made concrete shingles, which has become an accidental Instagram sensation, turning this East End industrial estate into an unlikely place of pilgrimage for the selfie brigade.

Such things might make their projects sound like fleeting designer stage-sets or marketing-friendly “pop-ups” produced by agents of gentrification. But that would miss the point that Assemble’s work is founded in an interest in issues, and sites that go way beyond constructing pretty scenography in gritty industrial locations. It is about engaging with people on their own terms, driven, as they put it, by “a belief in the importance of addressing the typical disconnection between the public and the process by which spaces are made”.

Theirs is a down-to-earth, no-nonsense attitude that comes in part from the mix of disciplines involved. While many of them studied architecture at Cambridge, others came from backgrounds in English, history and philosophy, or had worked as builders or technicians. As one member said of his non-architect colleagues in a recent interview: “They can be so much more astute and direct than the rest of us, who are loaded with the language of obfuscation and meaning with which architectural education indoctrinates you.”

Their plain-speaking approach seems to go down well with their clients, too. Countless are the architects who talk of engaging with communities, wielding Post-it notes and collaborative board games, but Assemble do it for real, often embedding themselves in places for months at a time.

New Addington town square … the result of weeks of testing uses with temporary structures and events.

I saw them in action in New Addington, the Croydon council estate long damned as a “benighted ghetto”, where they took up residence in an old kiosk on the town square and staged community events during a number of weeks, as full-scale tests for how the public realm might be improved. After orchestrating such things as a stage for pensioners’ tea dances and ramps for young skateboarders, and reorganising the market, they proposed permanent improvements along similar lines. The result is a low-key collage of pieces that have since taken on a life of their own.

I’ve seen them at work in Dalmarnock in the east end of Glasgow too, where the regenerative juggernaut of the Commonwealth Games razed the local high street and bulldozed the local park to make way for a “transport hub” for the games. Assemble have since been helping to pick up the pieces, building an adventure playground that prioritises mud and understands the fun to be had with logs, sewer pipes and tree-houses, instead of the officially sanctioned play equipment beloved of risk-averse local councils. In June, they’ll be unleashing further ideas about play with a Brutalist Playground installation at the Royal Institute of British Architects, injecting a much-needed dose of whimsy into the prim surrounds of Portland Place.

Goldsmiths Art Gallery … being carved out from a series of extraordinary spaces within a former Victorian bathhouse.

All this and more is what piqued the interest of Alistair Hudson, director of the Middlesbrough Institute of Modern Art and one of this year’s Turner prize judges. He invited himself to visit the Assemble studio earlier this year. They didn’t know why he had come and, as usual, they were mostly too busy to talk.

Receiving the phonecall from Penelope Curtis last week – an occurrence met with equal bafflement – Assemble’s first reaction was to call the Granby residents. If the community didn’t want the attention, they wouldn’t accept the nomination.

“They were very conscious that the residents had been battling to save their the street for 25 years,” says Rushton. “It had been a gradual process, beginning with the community doing guerilla gardening and setting up a monthly street market, which gradually changed the reputation of the place and started to bring people back during the last five years. It’s not something that’s happened overnight.”

Back in Granby, the residents couldn’t be prouder of the Turner prize news.

“It’s just a fantastic boost for the whole area,” says Delucia Emina, 31, who set up the Baby Dolls beauty salon on Granby Street last year, the first new sign of life the high street had seen in a decade, where most of the units remain boarded up. Born on Granby Street, Emina moved away at age eight, but recently returned, buoyed by the fresh shoots of optimism poking up through the pavement cracks. Since she set up in July last year, a kebab shop has sprung up next door, and she’s planning to expand across the street.

Whether any of this is of interest to the Turner prize judges is neither here nor there. Assemble’s work with the residents is thankfully bereft of any of the pretensions that the bestowal of such a gong implies. But if the prize wants to look outwards and engage with the real world, then its arbiters need look no further.

• This article was updated on 15 May to add further detail about Assemble’s Granby Four Streets project