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Proposed changes to the benefit system could cut the number of homes likely to be built under the government鈥檚 new affordable housing programme by 40%.

A leaked letter from Nico Heslop, the private secretary of communities sectary Eric Pickles, to Matthew Style, private secretary to prime minister David Cameron, says that the proposed cap on overall benefits at 拢26,000 a year could reduce the number of homes built by 23,000.

The government is planning to use its new affordable rent product to build 56,000 homes by 2014, meaning the change could reduce plans by 41%.

The letter, leaked to the Observer, shows that the government has been aware of the impact of housing benefit changes despite continued denials that it was able to model the effect of the changes.

The government says it will be particularly hard to build new large homes, which are the most needed in many high demand areas. This is because changes to the way social housing is funded means that landlords will be allowed to raise rents for new homes to 80% of market rents, making the housing benefit bill for the new properties potentially unaffordable under the benefit cap.

The letter says: 鈥淲e are worried about the impact of this measure on our ability to build social housing for families through the new affordable rent product. To fund new affordable housing development providers need to be able to charge rents of up to 80% of the market levels but the impact of the Overall Benefit Cap will prevent them from doing so in many areas greatly reducing their financial capacity.

鈥淚nitial analysis suggests that of the 56,000 new affordable rent units up to 23,000 could be lost. And reductions would disproportionately affect family homes rather than small flats. For example it would be extremely difficult to fund any four bed properties, so desperately needed, anywhere in the country - disproportionately impacting on families and therefore children.鈥�