A merger between Circle Housing and Affinity Sutton would be the largest ever for UK housing, creating a landlord which would be home to almost 500,000 people across England and own 5 per cent of the sector.

The need to build more homes and recent rent-reducing Budget announcements from George Osborne has been revealed as a catalyst for the talks as organisations seek ways to work more efficiently and consider consolidation.

Osborne announced in his Budget that rents in the social housing sector in England will be reduced by 1 per cent for each of the four years from 2016, causing turmoil to projected income streams.

“As the recent election showed, new housing has become a critical issue for the country and yet there are few effective routes to providing the social and affordable homes at the scale so desperately needed,” said Keith Exford, CEO of Affinity Sutton.

Mark Rogers, CEO of Circle Housing, said: “Housing associations have a duty to address this issue, but the squeeze on government funding has made it difficult for our sector to find the cash to do so.”

“In the light of the significant reduction in our rental income announced in the Budget, both organisations are reviewing their business plans. As part of this we are also jointly exploring if we could raise significantly more capital together, allowing us to fund a far greater building programme than we could if we stay apart,” added Keith Exford, CEO of Affinity Sutton.

Mark Rogers said: “It is very early days while we model the potential that this could have, in the context of the radically altered business plans which both organisations are now preparing; but we passionately believe that the sector needs to transform and this is one potential way to make that step change. Until we make further progress with our discussions, we will not be able to give any more detail about how the merger would work in practice.”