Rishi Sunak is to drop compulsory housebuilding targets to see off an embarrassing backbench rebellion, prompting criticism he is putting party unity over the national interest. The capitulation, which comes in the middle of a national housing crisis, will spark fresh concerns that the prime minister is too weak to take on unruly Conservative backbenchers. It followed up to 100 Tory MPs threatening to back an amendment that would in effect force the government to abolish the target of building 300,000 homes a year in England. Instead, the target will be “advisory” and councils will be allowed to build fewer homes if they can show hitting it would significantly change the character of an area, an exemption expected to particularly apply to rural and suburban communities. The move was described as “extremely worrying” by housing campaigners but saves Sunak and the housing secretary, Michael Gove, a humiliating showdown in the Commons. They were forced to pull a vote on the levelling up and regeneration bill last month when the rebellion first came to light. For weeks, No 10, Gove and rebel ringleaders Theresa Villiers and Bob Seely have been holding meetings to find a “landing zone” that could satisfy both sides and avoid another blue-on-blue feud over planning. Sources suggested the government initially hoped to buy off Tory opponents by offering to add amendments to the bill. These included further restrictions on “landbanking” – the practice of buying land for investment without any active plans for its development – and a crackdown on second homes, an issue in some tourist hotspots in Cornwall and Devon. But the rebels refused to cave in, and the Guardian understands the demand for the mandatory housing target to be axed was accepted by Sunak and Gove at the end of last week. In a letter to Tory MPs on Monday, Gove said he recognised “there is no truly objective way of calculating how many new homes are needed in an area” but the “plan-making process for housing has to start with a number”. The change would make the centrally determined target a “starting point”, with councils able to propose building fewer homes if they faced “genuine constraints” or would have to build at a density that would “significantly change the character” of their area. He said he was “grateful” to MPs who had been pushing for “much-needed changes”. Seely said the deal reached was a “happy compromise”, adding the prospective rebels had “got everything we asked for, because the government said ‘that’s a good idea’”. He claimed that well over 100 Tory MPs had backed the proposed amendment. But a government source suggested the bill had been “watered down so much that all you’re left with is a glass of water”. The bill was pulled during its report stage in the Commons, but could be tabled again as soon as next week with the government’s amendments added. Changes made on top of the overhaul to targets include potentially fining firms that fail to build on land despite having planning consent and letting councils refuse further permission across their area. A registration scheme for short-term lets will also be created, with ministers considering whether fresh planning permission would have to be granted for homes to be turned into Airbnb-style rental properties. Other changes billed as fulfilling Sunak’s leadership campaign pledges over the summer were for the green belt to be protected by issuing new guidance to councils saying they would not need to consider such land to deliver homes. Sunak’s attempt to quell one rebellion may ignite criticism from another group of Tory MPs, who had urged him to stand firm. The immigration minister, Robert Jenrick, is believed to have strongly supported the mandatory target and presumption in favour of development remaining. Senior MPs on the backbenches have previously criticised the rebels. Simon Clarke, the former levelling up secretary, said their proposed amendment was “very wrong” and would only cement “fundamental inter-generational unfairness”. Sajid Javid, another former housing secretary, previously warned that scrapping the mandatory target would “put meaningful policy into reverse” and represent “a colossal failure of political leadership”. Other critics of the amendment included Robert Colville, who helped write the 2019 Conservative manifesto. Lisa Nandy, the shadow levelling up secretary, said it was “unconscionable in the middle of a housing crisis” to drop the mandatory target. Labour had offered to support the government, she said, meaning the rebels would have been easily defeated, but it was understood Sunak was unwilling to rely on opposition votes to pass the bill. Nandy claimed Sunak and Gove had put “party before country” and added: “This is so weak. The prime minister and cabinet are in office but not in power.” The Priced Out campaign, which is lobbying the government to ensure the building of more affordable homes, said it was an “incredibly worrying” development as the target was “a key tool to get the houses we need”.