Councils furious as government allows asylum seekers to be housed in demolition areas

Councils working on pathfinder projects for the housing market renewal fund have reacted furiously to the revelation. The private housing in question will eventually have to be bought back by town halls using public regeneration cash.

Two notorious tower blocks in Liverpool were recently emptied after a campaign by the council. But some former residents were rehoused in areas of the city such as Kensington – a New Deal for the Communities area that will form part of the pathfinder project.

Housing associations have already agreed not to let the housing, as up to 2000 homes are earmarked for clearance.

But private landlords are buying up the cheap terraces and installing asylum seekers under their contracts with NASS.

Liverpool council deputy leader Richard Kemp said NASS was causing two difficulties.

"We already have a transient population in these areas and this is adding to the problem of people moving around," he said.

"It is giving an artificial price to properties that we will eventually have to buy using government money, so we will be able to do less with that cash. This is an utter failure of the government to join up its working."

Other pathfinder councils report similar problems. Kemp has invited Home Office minister Beverley Hughes to a summit to try to achieve a sensible policy.

The Home Office said it was aware of the problem, but that contracts with private landlords still have three years to run.

It said the pathfinders were designated after NASS signed its contracts so the situation cannot be changed, but it expects the contracts to have ended by the time the pathfinders get under way.

A spokeswoman added: "If councils inform us, we are not accepting any new applications from private landlords for those areas."

This latest development places further strain on the relationship between councils and NASS.