Anita Grice, director of the Campaign to Protect Rural England in Cornwall, said the ruling on changes to Section 106 agreements will hit communities in the South West “hard”.

While North Devon councillor Brian Greenslade has warned it will push younger families out of the countryside, putting the future of rural schools at risk.

Ministers confirmed on Wednesday that plans to exempt small-scale developments from section 106 affordable housing obligations had been restored by the Court of Appeal.

The decision followed a lengthy court battle, which initially saw the Government policy overturned.

This latest move has been welcomed by construction firms, who claim the changes will make smaller, more sustainable housing projects financially viable.

Brian Berry, chief executive of the Federation of Master Builders, said the new system will lift “serious barriers” for small and medium sized firms to deliver much needed housing.

campaigners argue that these small-scale projects – defined as five or less properties in rural areas – are a crucial source of affordable housing in the countryside.

Ms Grice said the availability of affordable stock in areas like Devon and Cornwall is already “dire” and the new ruling “will make it even worse”.

“It means that local authorities will have less say on the type of housing that gets built and affordable housing provision in our market towns and villages will become even more squeezed,” she said.

“Less provision means that many local people will find it difficult, if not impossible, to remain in areas where they have community ties.

“Instead we will see more housing built for the open market – and this will contribute to the ever-increasing gentrification of our countryside.”

Shadow Lib Dem leader cllr Greenslade added: “If local planning authorities cannot condition for some affordable housing in rural communities then younger families will decamp to larger urban areas. Such depopulation of younger families will threaten the future of small schools for example.

Taking this together with the Tories voting down the wholly sensible amendments put forward in the Lords in respect of the Housing and Planning Bill… the Government has dealt a hammer blow to the housing aspirations of many local young people.”

The Department for Communities and Local Government said the ruling “restores common sense to the system” and will encourage new developments.

Housing minister Brandon Lewis said: “This will now mean that builders developing sites of fewer than 10 homes will no longer have to make an affordable homes contribution that should instead fall to those building much larger developments.”

How the Section 106 row developed:

March 2014: The Government published a consultation proposing to scrap section 106 obligations on the provision of affordable homes for developments of 10 properties or less (5 or less in rural areas)

Rural campaigners quickly responded with warnings about the impact on affordable housing supply in rural communities

November 2014: the policy is adopted

May 2015: West Berkshire Council and Reading Borough Council launch a legal challenge against the reforms, arguing that the consultation process had been unlawful

July 2015: Justice Holgate quashes the Government policy, describing it as “unlawful” and “unfair”

The Government announces it will appeal the ruling

May 11 2016: The Court of Appeal rules in favour of the Government, restoring its changes to the section 106 regulations.”