Key workers get housing assistance.
Measures to be announced this week will also include a crackdown on greedy landlords who rake off millions in tenants' housing benefits.
A green paper to be unveiled by Deputy Prime Minister John Prescott signals the biggest shake-up in council house provision since Margaret Thatcher introduced the right-to- buy 20 years ago.
Private developers are to be brought in to run council estates through joint boards with tenants, and thousands of homes will be transferred to housing associations.
A new "starter home" scheme of interest-free loans will be proposed to help nurses, teachers, police officers and fire service workers who cannot afford to buy or rent near their workplaces.
The proposals will also include steps to force landlords to lower extortionate rents and to crack down on housing benefit fraud, currently costing pounds 2billion a year.
A new housing credit for people on low incomes will be introduced which can be set against rent instead of cash.