Any proposed changes would be politically controversial
Ministers may review the entitlement of council house tenants to keep their subsidised home for life amid pressure over long waiting lists.
Housing minister Margaret Beckett is examining options to deal with the shortage of new social housing.
One proposal would see new tenants offered fixed-term rental contracts and encouraged to move into private housing should their circumstances improve.
One MP said this was unacceptable and no substitute for building more homes.
The government is set to publish a green paper on housing early next year and ministers are keeping their options open at this stage.
But there is pressure to address the imbalance between the number of people waiting for council houses and the availability of properties.
Nearly four million people are waiting to be housed but only 170,000 properties are becoming available every year.
Ministers want to give priority to the most needy, particularly at a time of growing economic hardship and mounting repossession levels.
Proposals from the Chartered Institute of Housing (CIH), being studied by ministers, would potentially end the longstanding entitlement to a council house for life for those allocated one.
It is proposing that new tenants would be subject to reviews of their housing needs every three or four years.
If their financial circumstances have improved significantly, tenants may then be encouraged to move into the private sector, or to explore shared ownership schemes.
Richard Capie from CIH, which represents both housing associations and private landlords, said a "different approach" was needed to the supply of public housing.
It was right that better-off council tenants - of which the Institute estimates there are about 275,000 - should either look at other options or see their existing rent levels rise, he said.
"We need to be looking at this right across the board," he said.
"It is about making renting a much more attractive option for more people and making affordable renting available to more people."
A review of council housing entitlement had "been put in the 'too hard' basket for too long", he added.
But Austin Mitchell, chairman of the Commons Council Housing Group, criticised the proposals, saying it was fundamental tenet of council housing that it was secure.
"It is an attempt to turn council housing into a kind of transit camp for the poor and needy," he said.
"That is not the purpose of council housing. Council housing is about providing secure accommodation for people who need it."
Building new council houses was the only way to address the shortfall in existing affordable housing, he argued.
"In a recession, the one obvious answer is to build more houses, particularly the kind of housing that is most needed now which is public housing for rent and provide money for the councils to build it. No other alternative will work."
Need for debate
Under current rules, councils are required to immediately find houses for the homeless and most potentially vulnerable, including pregnant women, teenagers between 16 and 17, families with dependent children and young people leaving care.
But concerns about people abusing the system and some tenants becoming well-off on the back of decades of subsidies persist.
Former housing minister Chris Leslie, now chairman of the think tank New Local Government Network, said there needed to be a debate on how scarce housing resources were allocated.
"I don't think anybody is talking about evicting people," he said.
But tenants' circumstances may change considerably over the years and it was right to take this account.
"I think it is absolutely right to start asking the question can we help people throughout the most difficult parts of their lives rather than just seeing a council house as a house for perpetuity," he said.
He added: "We have a finite amount of housing and either we have to build more and quickly or manage the stock more intelligently."
A government spokesman said Ms Beckett was considering "all the evidence and arguments in favour of changes to the current system".
"We recognise that housing professionals like the CIH have made a case for reform in the social housing sector," he said.
"However she has not taken any decisions on measures that may form part of a reform package."