The recent debate over housing benefit has been conducted through the foggy haze of misinformation and bluster. Thousands of column inches were wasted last month as journalists missed the wood for the trees and debated the relative merits of a housing benefit cap that will save just £65m.

Blame for this lies squarely at David Cameron's door. He described the cap as the "key change" in his package of reforms, neglecting to mention that it makes up just 3 per cent of the total cuts to housing benefit. Either the Prime Minister does not understand his own policy or, more likely, he was attempting to divert attention away from the folly of George Osborne's reforms and avoid a public debate on the future of affordable housing.

Labour's manifesto clearly stated: "Housing benefit will be reformed to ensure that we do not subsidise people to live in the private sector on rents that other ordinary working families could not afford." This remains the right approach.

Not so sensible are the coalition's plans, which prioritise cutting the housing budget without due thought for the risk or costs of making people homeless. The total package of the coalition's housing reforms go well beyond a defensible cap on total benefit payments.

Two policies stand out for their wrong-headedness. The coalition wants to reduce the quality of housing available to all recipients of housing benefit, regardless of the current cost, by pushing down allowances to the equivalent of the cheapest third in any area. Second, they will cut housing benefit by 10 per cent for the long-term unemployed – particularly poorly timed, given that 1.6 million jobs are likely to be lost as a result of government policies. In carrying out these plans, the coalition has given no guarantees that vulnerable children or elderly people will not be moved from their homes and communities.

Neither will these policies just affect the work-shy or those living in shiny housing in central London. Just one in every eight housing benefit recipients is unemployed, with most in low-paying jobs. Meanwhile, the changes to Local Housing Allowance will affect 140,000 people in the north-west, 120,000 in the south-east and 100,000 in Yorkshire and Humberside, as well as 170,000 in London. In total, close to one million people will be affected, according to figures from the Department for Work and Pensions.

Rowing back

To mitigate these changes, the government will allow a pot of discretionary cash of just £40m for those in trouble; this represents a compensation fund worth a paltry 2 per cent of the savings. When this has been exhausted and the rise in homelessness predicted by the National Housing Federation commences, the government will have to choose between callously leaving families to fend for themselves or backtracking with a sticking-plaster approach to an exacerbated public policy challenge.

Tories in Westminster are clear about which direction they prefer. Cllr Philippa Roe has written to the government asking for councils to take less responsibility for homeless people.

There is another approach.

First, any housing benefit cuts must be accompanied with proper compensation for the losers and a commitment that no one will end up on the streets. And proper account must be taken of our responsibility towards vulnerable residents.

Second, everything possible must be done to reduce unemployment and underemployment, which has been the single biggest driver of the housing benefit spike in recent years. Cutting 1.6 million jobs won't just ruin lives and livelihoods, it will also put upward pressure on the Budget.

Third, we must increase pressure on private-sector landlords who are profiteering on housing benefit tenants, at the expense of taxpayers. It may be time to look again at a rent cap. Ifthis works for New York, could it work for our own large cities?

Fourth, there must be a new focus on housebuilding – an area that Labour in government neglected, but the coalition is set to destroy. Earlier this year, Eric Pickles scrapped regional housebuilding targets, with the predictable result that councils dropped plans for 85,000 new homes. The free-market pamphleteer Tim Leunig, a professor at the LSE, said recently, "No academic or independent expert I know believes that the incentives are large enough to maintain, let alone raise, housebuilding rates."

Push and pull

Even worse, the Spending Review slashed the housing budget from £2.8bn to £1.1bn a year – a third of its former size. As a result of another reform, funds for new, low-cost homes will have to come from the social rented sector – robbing Peter to pay Paul.

It is nothing short of a disgrace that homes for some of the poorest social housing tenants will be funded not progressively, but by the poor themselves.

The government has backed the idea of a Green Investment Bank. As homes contribute close to 30 per cent of Britain's carbon emissions, why not expand the scope to include energy-efficient new houses?

In addition, local councils and other public bodies should be able to club together to borrow against their shared assets – including the stock of council housing – to increase the pool of capital available. Removing planning restrictions on brownfield sites and providing greater certainty for private investors should also be a priority.

Building new homes is essential to reducing the length of waiting lists, easing the impact of rent increases on the public purse, and helping meet people's aspirations for affordable housing. But everything the coalition is doing is pushing in the other direction. They must take a different approach before it's too late.

Will Straw is editor of Left Foot Forward and David Lammy is the Labour MP for Tottenham.