Birmingham City Council, which badly needs cash to repair crumbling stock, planned to sell 84,000 council homes to a network of not-for-profit trusts - but will have to think again after two-thirds of the city's council tenants voted against it in a postal ballot.
The decision sharply reverses what has been seen as a trend in favour of transferring houses to housing associations and trusts - tenants in Glasgow and Bradford have both backed multimillion-pound transfers of council homes. But in Birmingham, tenants were suspicious about what they saw as "privatisation" and now the Government's target of transferring 200,000 council houses during the next 10 years is in jeopardy.
The Government sees stock transfer as the only way to access the necessary finance for vital repairs to crumbling council properties. Unlike local authorities, housing associations and not-for-profit trusts are allowed to raise cash on the open market.
Gina King, Midlands officer at the National Housing Federation, the national body for non-profit housing organisations in the UK, described the Birmingham decision as "very sad".
"It's not just the financial argument - tenant-led, not-for-profit housing associations are more democratic, foster responsibility among council tenants and build up a local feeling of community," she said.
But Mark Weeks, a spokesman for Defend Council Housing, a national pressure group of tenants and unions said the not-for-profit model misled the public.
"Not-for-profit is a red herring. There are huge profits at stake in this sector - it's predicted to be worth ?xA3;40-?xA3;50 billion over the next five years," he said.
The Government is planning to enable local authorities to borrow directly to invest in housing by 2004, said Weeks, which would make stock transfer unnecessary.
Roy Read, chair of the Bloomsbury tenant-owned and managed association in Birmingham, said the proposals meant less money, less accountability and less democratic rights for tenants. He said: "We advised our tenants to vote 'no' because as local authority tenants they have a legal right to take on housing management functions. We were afraid that this would be lost or watered down under the proposals."