The first of Peabody's prefab housing projects to be completed is a handsome corner block at Murray Grove on the fringes of the City of London. It also contrives to be equidistant from fashionable Clerkenwell and equally fashionable Islington. Demographically then, it's sorted. But to keep the rents reasonable, the building had to be cheap - or potentially cheap, since this was a prototype. So Peabody, under its forward-thinking development director Dickon Robinson, ran an architectural competition among younger architects to find new ideas in modular housing. Architects Cartwright Pickard won the contest. You wouldn't necessarily know it at a glance, but the terracotta-clad Murray Grove block with its glass-and-steel corner rotunda is made of stacked-up room modules that are first cousins to Portakabins.

There is absolutely nothing new in the idea of a fully-finished room module delivered on a truck, complete with all the fittings including kitchens and bathrooms, even carpets and lights. A lot of budget hotels and fast-food restaurants are built this way. As for big prefabricated cladding panels, why, that's how they wrap up office blocks, and have done for decades. So do we conclude that it is only the negative connotation of "prefab" that has kept these proven techniques away from housing?

Most parts of a "conventional" house are factory made. But most of those parts are small, and put together, well or badly, on site. The difference with the new Peabody method is that nearly all of these components are assembled in the factory before being sent out - a complete room-full at a time, in fact. Since each steel-braced room-pod also provides most of the structural strength and insulation for the building (rising to five floors at Murray Grove, and capable of reaching seven), it becomes very much like giant Lego.

What does it all come down to? Since the rooms, once you are in them, are just rooms that could have been made by any method, then the residents presumably aren't bothered how they are put together. The difference, in fact, is purely financial. Murray Grove took just seven months to build, far faster than a conventional apartment building, which meant a lot less disruption to neighbours. As a prototype, the room units were not especially cheap. But immediately Peabody found another site - a former dairy at Stoke Newington in North London - and another firm of rising young architects, Allford Hall Monaghan Morris, has designed the next generation prefab block, twice the size, using the same room modules made in York.

It is only a start. Peabody and others will have to build hundreds - thousands - more such apartments before the real economies of scale kick in. Murray Grove, being the first, actually cost around 15 per cent MORE than a conventional block, though it was much quicker to build. The next one will cost around the same as traditional methods, and the aim thereafter is to bring the costs down to 15 per cent LESS than the norm. As Peabody's Dickon Robinson points out, this means that others - including private spec housebuilders as well as other social housing providers - have to join in, to keep the production lines rolling. Cheaper housing for all, private and public? For this reason if no other, the Murray Grove prototype has joined the select list of buildings deemed worthy of "Millennium Product" status.