The housing secretary is exploring a government-run developer with the power to borrow below market rates, a move that could put Whitehall in direct competition with Britain’s biggest builders.

Steve Reed has been working up plans for a state-owned housebuilder, according to details leaked to the Guardian, as ministers hunt for fresh ways to revive stubbornly low rates of construction.

The proposals, which are not yet finalised, would create an independent body able to borrow at lower rates than private developers and housing associations. For SME builders watching margins tighten on every site, the prospect of a deep-pocketed public rival is significant, even if the government insists the new entity would not be allowed to swamp the private sector.

The plans cannot be enacted before Sir Keir Starmer steps down as prime minister. The cabinet secretary has ordered that no major announcements be made until the new government takes office. They could, however, appeal to the most likely next occupant of Number 10, Andy Burnham, who has spoken of taking greater public control over “the essentials of life”.

Sir Keir took office two years ago promising a major uptick in housebuilding. To get there, his government liberalised the planning system and allocated £39bn to social and affordable homes over the next decade through the Social and Affordable Homes Programme, administered by Homes England.

The stimulus has lifted output from the lows of late 2023 and early 2024. Ministers said last week that the number of affordable homes started had risen by 26% over the past 12 months, a figure broadly in line with Homes England’s own published statistics.

The headline totals, though, remain well below where they sat three years ago and well short of where they need to be. Sir Keir promised 1.5 million new homes over this parliament, yet the latest figures show builders began work on just 130,170 in the past 12 months, roughly half the annual average required to hit the goal. As Business Matters has reported, the 1.5 million homes pledge is already slipping, with London building only a fraction of what it needs.

Much of the problem comes down to the cost of materials and debt. Wars in Ukraine and the Gulf have pushed up inflation and, with it, the cost of putting up new properties. Housing associations warn that the structure of the affordable housing budget, with much of the money arriving in the later years of the scheme, risks making matters worse.

In the meantime, Reed and the London mayor, Sadiq Khan, have agreed to cut affordable housing quotas in an effort to coax private developers into building more. It is a trade-off small developers have long argued cuts both ways, as Business Matters noted when smaller firms called for more flexibility in the government’s affordable housing plans.

Reed is now understood to be weighing a more radical intervention. Under the plans, money currently allocated to Homes England would be used to set up a new, arm’s-length body to oversee housebuilding.

The organisation would use that funding to buy land and bring forward projects. It would not pick up the trowel itself, instead contracting private firms to build, a structure that could open up work for the SME contractors who have seen their share of the market shrink for decades. It could also be handed borrowing powers, which would let it grow into a far larger entity, though at the cost of higher government debt.

The state-owned developer would build homes of all kinds. In one version of the idea it would put up commercially available properties, which could see it compete head-on with some of the country’s biggest housebuilders. It would also deliver affordable homes, taking on part of the role currently played by housing associations, many of them so cash-strapped that they are struggling to buy up the subsidised properties private developers have already built.

The scheme would be piloted in a small area first, and those familiar with it say it would not be allowed to grow so large that it undermined the private sector.

Reed’s policy exploration lands at a moment when many ministers are eyeing ideas that might appeal to an incoming Burnham administration. The housing secretary has been one of Sir Keir’s most loyal allies and defended him even in the final days before the resignation. He did not, however, appear on the steps of Downing Street for the resignation speech, and turned up in the Commons later for Burnham’s inaugural photograph as Makerfield MP.

Burnham is likely to be named Labour leader on 17 July and take office three days later. He is expected to set out early thinking on devolution and the economy in a speech in Manchester on Monday.

Ministers are now barred from announcing new policy, and some have already come unstuck for floating ideas. In an article last week for the Times, the Home Office minister Mike Tapp suggested exempting foreign care workers from plans to make settled status harder to obtain for migrants. The piece triggered a government row, with the home secretary, Shabana Mahmood, accusing him of leaking internal departmental plans and demanding the prime minister sack him. Number 10 said Tapp would be “reminded” of his duty to collective responsibility, but that appointments and dismissals remained in Sir Keir’s hands.

A spokesperson for the housing department said: “New housing starts have increased by nearly a quarter compared to the same time last year, while last year also saw council housing completions at their highest since 1992. We are always looking at ways that we can go further and build the homes we need.”

For Britain’s small builders, the question is whether a state-owned developer ends up as a customer, a competitor, or both.