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Councils can now apply to central government to have their borrowing caps lifted so they can build more affordable housing and help tackle the growing UK housing crisis.
They must bid to central government for a share of £300m extra borrowing allowance to build more affordable homes in their areas.
Successful bidders will have their borrowing caps raised so they can use debt to fund house building in their local areas. Local councils are subject to a cap on their borrowing imposed by central government.
In order to have their bids approved, the government said councils must "demonstrate maximum value for money, by including funds from disposal of surplus assets, particularly high-value vacant stock, and by bringing forward their own land for new affordable housing."
Local authorities have also been granted the power to sell off council-owned land at below its market value, as long as it will be used to build affordable housing.
The measures had been announced by Chancellor George Osborne in his 2013 Autumn Statement, but have now taken effect.
Eric Pickles, communities secretary, said the government has "untied the hands of councils so they can take more responsibility for housing in their area".
Successful applicants will see their borrowing caps lifted in the two years from 2015 and the government predicts it will generate 10,000 more affordable homes.
But critics of the borrowing cap on councils want it scrapped altogether, a move the Local Government Association (LGA) claims could result in 60,000 new homes over five years.
Britain has a serious housing shortage. According to the government's National Housing and Planning Advice Unit says the UK needs 290,500 new homes a year until 2031 if it is to meet current demand.
But the volume of new homes registered with the National House Building Council (NHBC) hit 133,670 during 2013, though this is up 28% on the year before and the most since 2007.