Young people struggling to buy their first home should be offered loans by the government to help them pay the deposit, according to a new report which warns that reduced home ownership and the recent surge in private renting is damaging family life.

The idea has been put forward by the Housing and Finance Institute (HFI) as one of several initiatives it believes necessary to increase the number of homeowners by one million by 2035. As with the current system of student loans, the HFI suggests the loans could be repaid as a proportion of salary once the recipient has reached a certain income threshold.

Alternatively the money could be repaid under a simple repayment arrangement, although at a low interest rate and over a long term. The loans would be written off after 40 years or at state retirement age, whichever comes first.

With six million more people now living in short-term rented housing than 15 years ago, the HFI says urgent action is needed to boost home ownership, as evidence mounts that a good and stable family home has beneficial effects on people’s health, their sense of economic stability, and children’s educational attainment.

According to the government’s own English Housing Survey last year, the number of first-time buyers dropped from 922,000 in 1995 to 654,000 in 2016 while the average age of first-time buyers rose. The proportion of first-time buyers coming from the private rented sector rose from 39% to 66% over the same period.

Natalie Elphicke, chief executive of the HFI and a former adviser to the government on housing, said: “The 15-year experiment of expanding the private rented sector on a huge scale has failed. It has left too many people facing exorbitant rents for poor-quality homes, with severe detrimental effects on their living standards and future opportunities. The evidence is compelling. It is time for a rethink.

“It is high time we introduced a strategy that incorporated both social housing and home ownership as priorities, instead of peddling the usual narrative that one is good and the other bad. We need a fresh perspective to ensure we don’t just provide more and more homes, but that we provide good homes for all generations We need to move away from the current emphasis on the private-rented sector.

“The younger generations face triple difficulty in that they have less access to social housing, less access to home ownership and pay the highest rents compared to their pay. We need radical new measures to help the younger generation and to regain a balanced, fair housing market.”

The report, co-written with the housing association Radian, suggests poor-quality homes and high levels of private renting are also having a negative effect on labour market mobility, with fewer people moving for work than in previous decades.

“This fall in housing mobility has damaged the economy as fewer people are moving for work, especially younger people,” it says. “It also means younger people are losing out on the wage boost that comes with labour market mobility.”

It also says prospective first-time buyers could be offered a “first home deposit tax allowance” under which the mortgage interest on their repayments could be deducted from tax – effectively reinstating the old Miras mortgage interest tax relief system. The authors say that, while this would mean an additional short-term cost to the Treasury, it would boost personal savings over a lifetime while reducing inequality, and produce longer-term gains to the exchequer.

The HFI suggests that private renting has a detrimental effect on the development of children, with a quarter of children living in “bad housing” gaining no GCSEs. It also has a negative effect on family stability, tendency to commit crime, and general wellbeing, it says. Some 32% of renters describe themselves as lonely, compared with 17% of homeowners.