Landlords should be banned from chopping up houses into smaller and smaller rental properties to maximise their profits, according to local authorities.
The Local Government Association has called on the government to introduce jail sentences for rogue landlords who force people to live in "poor and dangerous" accommodation.
The LGA, which represents 370 councils in England and Wales, said that due to a planning loophole, landlords can convert houses into six smaller, self-contained one-bed or studio flats, which are typically inhabited by people who rely on housing benefit to pay the rent, without gaining permission.
The LGA said: "The loophole abuses legal exemptions and the lack of clarity in environmental health, planning and housing benefit rules to avoid detection and is resulting in widespread abuse of taxpayers’ money, as well as housing tenants in poor and often dangerous accommodation."
The amount landlords earn from housing benefit – £9.3 billion in 2015 and twice the figure a decade ago, according to the National Housing Federation – is thought to partly stem from the conversion of homes into smaller properties.
Last year, BuzzFeed News visited a woman who risked going blind because of the damp in her tiny one-bed flat, which was previously the bedroom of a large Victorian house. There are now 11 flats in what was once a single family home, all managed by the same landlords and all paid for through housing benefit.
New government rules coming into force later this year will give councils the power to fine rogue landlords £30,000 for failing to act on improvement and overcrowding notices. But the LGA said more powers, including the threat of jail, were needed to stop the spread of "microflats".
Councillor Judith Blake, leader of Leeds city council and the LGA's housing spokesperson, said: "No landlord can act outside the law and councils will do everything in their powers to ensure tenants can live in rented properties safe in the knowledge that local authorities are there to protect them.
"However, the reputations of all good landlords are being tarnished by the bad ones and councils are being let down by the current system. Legislation is not keeping pace with the ingenuity of landlords to exploit loopholes which need to be closed as soon as possible.
"Legislation needs to be more joined up to prevent some landlords taking advantage of people at the sharp end of our housing crisis."
In February, a landlord was banned from letting property in two London boroughs for 10 years because of the dangerous state of the homes she rented out.
Katia Goremsandu was the first landlord to be given a criminal behaviour order, after a successful prosecution by Westminster council. A flat she let in Gloucester Terrace was found to have no fireproofing, no mains-connected fire alarm, and no fixed heating.
A spokesperson for the Department for Communities and Local Government said: "We’re determined to crack down on rogue landlords. New measures that came into force just this week give councils the extra powers they need to tackle the worst offenders and poor-quality rental homes in their areas.
"Thanks to our £12 million funding, more than 5,000 landlords are now facing enforcement action or prosecution. We’ll continue to work closely with local authorities, including to investigate any fraudulent housing benefit claims."