Nearly two million families could lose their only chance of a home if developers are freed from the legal obligation to build houses at "affordable" prices, critics warned yesterday.

There are growing fears that the Government plans to scrap rules which currently force developers to set aside a proportion of all new-build schemes for affordable housing. Property firms have long lobbied for the regulations to be loosened, claiming they discourage new building projects and hamper economic growth.

A long-awaited review of the private rented sector, headed by Sir Adrian Montague, chairman of the 3i equity group, is expected to recommend this week that local authorities should have the power to waive the so-called Section 106 rules, which put legally binding conditions on new planning permits.

Typically, local councils use Section 106 to force developers to make between 20 and 45 per cent of the houses they build "affordable", but the Communities Secretary Eric Pickles believes that these rules are slowing the pace of house building. But last night the Labour Party and housing associations united to condemn the plans.

Shadow housing minister Jack Dromey added: "It would be fundamentally wrong to deprive local authorities of their ability to insist on affordable homes in mixed communities, putting beyond the reach of the millions who desperately need a decent home at a price they can afford their ability to realise their dreams."

David Orr, chief executive of the National Housing Federation, which represents 1,200 housing associations, said: "The proposal to let local authorities reduce their affordable housing requirements in favour of market rented housing must be urgently reconsidered with 1.8 million UK families waiting for an affordable home to live in," he said.

House building fell by 10 per cent in March to June of this year, compared with the preceding quarter, despite a high profile government campaign to stimulate a sector of the industry which it was hoped would play a major role in reducing the unemployment totals. Although the number of new homes completed in the year to June 2012 was eight per cent up on the previous year, the number started was a worrying 10 per cent down. Relaxing of Section 106 rules is expected to top a list of five recommendations from Sir Adrian's review, which is due to be published in the next few days. It will be music to ears of the Communities Secretary, Eric Pickles, who is well known to see Section 106 as a bureaucratic obstacle slowing up the revival of house building.

Last week, Mr Pickles announced that he was dispatching a team of experts to give councils free advice on how to limit the impact of Section 106. He also announced that developers who had entered into these agreements during the housing boom are now free to ask local authorities to reopen negotiations.

"Too much development is being stalled because of economically unrealistic agreements negotiated between councils and developers at the height of the housing boom. This results in no development, no regeneration and no community benefits at all," a Communities Department spokesman said.

The controversy over Section 106 coincides with the publication today of a report from the highly influential Conservative think tank, Policy Exchange, suggesting that housing associations should sell the properties they hold in areas where house prices are high so they can replace with a larger number in places where housing is cheap.

The report, Ending Expensive Social Tenancies, argues that this could generate an income of £4.5billion a year, which could be used to build 80,000-170,00 new homes.