The funding will go towards a new generation of council and housing association homes, with the number of houses determined by type and location, as well as by bids received for funding.
The £2bn investment could supply around 25,000 more homes at rents affordable for local people.
Ministers also confirmed plans to create a stable financial environment by setting a long-term rent deal for councils and housing associations in England from 2020.
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The funding will also support councils and housing associations in areas of acute affordability pressure, and where working families are struggling with the costs of rent and some are at risk of homelessness.
The government’s affordable homes programme will increase from £7.1bn of public funding to £9.1bn.
The £2bn additional funding could result in total investment by housing associations and councils of up to £5bn.
Under the new proposals, increases to social housing rents will be limited to the consumer price index plus 1% for five years from 2020.
The government hopes that this will give social tenants, councils and housing associations the security and certainty they need.