Build more council homes. Not so long ago, this idea was, although not new, radical. So thoroughly had Margaret Thatcher schooled the nation in the virtues of private property that, decades after her departure, it still seemed outlandish to mainstream politicians to go back to what had been the main way of addressing housing need. Now, as it has finally sunk in that the private sector cannot, will not and should not be expected to fill all the gaps in the supply of homes, even Conservative politicians are calling for local authorities to be given the powers to do so instead.

However, whenever the case is made, it raises the obvious question, which is where to find the money. Everyone knows that housing is expensive. Everyone knows – or did, before it was found that national wealth can be frittered and forsworn in the great Brexit adventure – that the government has been in the grip of austerity for all of this decade. It’s a reasonable point.

There has always been a good answer to this question, which is that colossal sums are already spent on housing benefit, much of it going to private landlords and on providing temporary accommodation for the homeless. To spend on building council homes would reduce this expenditure and return income to the public purse whence it came. It would be an investment that would pay off in the not-too-distant future.

Gradually, local authorities have been given more ability to borrow and to build, which has resulted in some new council homes that are as good – thanks in part to standards set by modern building regulations – as any that have ever been built. But they are swimming against the current of another part of the Thatcher inheritance, her famous decision to allow council tenants to buy their own homes, at up to 70% discounts of their value, without allowing local authorities to reinvest the proceeds in new housing.

“Reinvigorated” by the coalition government in 2012, the policy is continuing to remove homes from public ownership. The coalition promised that changes they made to the policy, allowing councils to reinvest some of the proceeds from sales, would enable the replacement of homes sold. In practice, many more are being sold than are being built.

Shared ownership homes in Worland Gardens in Stratford, east London, designed by Peter Barber Architects for Newham council. Photograph: Morley von Sternberg

The result, as a new report by Tom Copley, a Labour member of the London Assembly, argues, is that 42% of ex-council homes in the capital are owned by private landlords, often in portfolios of five or more properties. Copley calculates that more than £900m a year would be saved if every benefit claimant in London in private rented accommodation were in council accommodation. He highlights a perverse consequence of right-to-buy policies, which is that councils find themselves paying, often at premium prices, to rent from private landlords homes that they themselves once owned. He also points out that conditions for residents in the private rental sector are generally worse than any other. At the London level, Copley’s conclusion is that right to buy should be abolished in the capital, as has happened in Scotland and is happening in Wales.

The case for this is compelling. There is also a bigger point that goes beyond the capital, especially other areas where pressures on housing are severe. This is that, short of an extreme libertarian position that housing should not be subsidised in any way, it is more wasteful not to build council homes than it is to build them. It is generally better for local government to own assets and receive income for them than it is to pay rent.

This is not to say that expanding public housing is easy. It is not only a question of funding but also of the supply of land, which is in turn a matter of planning. Given constraints across much of the country, especially in the south, this requires a higher level of constructive thinking and public confidence in planning processes than exists.

In principle, in a country of which (depending how you measure it) about 7% is developed, there is room for more. In principle, thoughtful planning can provide new homes that are beautifully or at least adequately designed. Modern garden cities could be created, with exemplary transport and open spaces, while also giving more people better access to nature than before. Serious organisations have proposed such things but it requires a leap of faith to believe that they will actually happen.

There is also a question of the ability of the construction industry, which tends to find it hard to expand and contract, to find the materials and labour to meet demand. If a recent cross-party report is to be believed, 3m socially rented homes have to be built by 2040. If these numbers are added to private sector housebuilding, annual output would be greater than at any time since the public housing boom of the 1960s.

Back then, builders turned to prefabricated systems of construction in order to improve output. The results were mixed, although they have since become common and successful in the building of offices. Now, private companies are again experimenting with making homes in factories, although, as this requires initial investment and therefore confidence in future returns, this is unlikely to happen in large numbers as long as there are booms and busts in housebuilding. Reliable and consistent public investment would help here.

It seems daunting and improbable that a country that has long proceeded with short-term responses to housing need, driven by the preferences of the private-housebuilding industry and private property-owners, should undertake such a far-sighted and co-ordinated set of policies. Whatever happens will certainly be more haphazard and piecemeal than it ideally could be. But there have at least been shifts – the experiments with prefabrication, the cautious consideration to planned development given by thinktanks and policy units.

Among these is the once unthinkable return of council housing, whose funding is one of several essential issues. Copley’s report, being London-based and focused on specific issues, doesn’t offer all the answers, but it helps to dislodge one more intellectual obstacle. It is one more nudge towards a saner future.

• Rowan Moore is architecture critic of the Observer