Michael Gove’s department is handing back £1.9bn to the Treasury originally meant to tackle England’s housing crisis after struggling to find projects to spend it on.

The Department for Levelling Up, Housing and Communities (DLUHC) has surrendered hundreds of millions of pounds budgeted for 2022-23, including £255m meant to fund new affordable housing and £245m meant to improve building safety.

Officials said the department was unable to spend the money, which accounts for about a third of its entire housing budget, thanks to rising interest rates and uncertainty in the housing market after the pandemic. But experts warn the lack of investment is likely to exacerbate the housing crisis in England, where homebuilding is forecast to drop to its lowest level since the second world war, according to the Home Builders Federation.

Jack Shaw, a local government expert who uncovered the figures through a freedom of information request, told The Guardian: “The government is experiencing significant challenges investing in housing because of a perfect storm in market conditions. But the decision to delay housing investment or withdraw it altogether as a result of lower than anticipated spending will mean fewer homes are built.”

Others blame bureaucratic inefficiency for the government failing to find the right schemes to spend the money on. Lisa Nandy, the shadow housing secretary, said: “The Conservatives have simply given up trying to solve the housing crisis that they helped create. Not content with slashing housebuilding by scrapping housing targets, stalling on renters’ reform or rowing back on their promises to leaseholders, ministers are either too incompetent or too out-of-touch to consider it a priority to fix dangerous buildings or build new affordable homes in the middle of a housing crisis.”