The government will build nine new prisons under plans to close Victorian jails and sell them for new housing.
Under the plans, five of the prisons will be built by 2020 and more than 3,000 homes could be built on the sites of the old jails.
Around 10,000 inmates will be transferred to the new prisons, in a move which could save around £80m.
Chancellor George Osborne said: “One important step will be to modernise the prison estate.
“So many of our jails are relics from Victorian times on prime real estate in our inner cities.
“So we are going to reform the infrastructure of our prison system, building new institutions which are modern, suitable and rehabilitative.
“And we will close old, outdated prisons in city centres, and sell the sites to build thousands of much-needed new homes.”
Grade II-listed HMP Reading, built in 1844 and closed in 2013, will be the first to be sold.
The BBC reported that the prison building programme is estimated to cost more than £1bn.
In addition to the nine prisons, a new jail is being built in Wrexham, with expansions taking place at HMP Stocken in Rutland and HMP Rye Hill in Warwickshire.
Justice Secretary Michael Gove said: “This investment will mean we can replace ageing and ineffective Victorian prisons with new facilities fit for the modern world.
“We will be able to design out the dark corners which too often facilitate violence and drug-taking.
“And we will be able to build a prison estate which allows prisoners to be rehabilitated, so they turn away from crime.”
Further details will be revealed in the chancellor’s spending review on 25 November.
Meanwhile, four government departments have provisionally agreed to cut their budgets by an average of 30 per cent over the next four years, ahead of the spending review.
The departments for transport, local government, environment and the Treasury have all agreed deals, the BBC has reported.
They will make cuts to their day-to-day spending over the period through efficiency savings and “closing low-value programmes”.