Labour Party housing spokesperson Phil Twyford says there's a risk community housing providers who buy state houses will go bust, and thousands of the houses could end up in private hands.
The Government last month announced plans to sell up to 2000 of the country's 69,000 state houses in the next year.
Photo: RNZ
Cabinet papers released by Treasury show there are major risks and the Government needs to ensure providers are financially sustainable.
Listen to Phil Twyford
Mr Twyford told Morning Report the Government was expecting banks and private investors to fund community providers, and the houses would be used as security.
"If they're secured creditors their right to get their hands on those properties in the event of one of these community groups falling over will be stronger than the Government's."
Listen to John Key
Prime Minister John Key conceded it was possible for a community housing provider to get into financial trouble, but questioned the likelihood.
He told Morning Report the risk was minute and was outweighed by the benefits of the sale programme.
Mr Key has repeated assurances that community housing providers who buy state houses will not be able to sell them on without government permission.
John Key Photo: RNZ / Jane Patterson
"There will be a contract formed between the Government and community housing providers that buy the houses.
"The community housing provider won't be able to on-sell the house unless they have the permission of the Government."
If permission was sought, the Government will evaluate the reason for the sale, Mr Key said.
The plan announced in Mr Key's state of the nation speech on 28 January was aimed at making more use of community housing providers by selling Housing New Zealand stock, and increasing the number of income-related rent subsidies.
Social house subsidies would be boosted from 62,000 places to about 65,000 by 2018, at an estimated cost of about $40 million more each year. As part of that overall increase, an initial 300 income-related rent subsidies would be offered to community housing providers in Auckland.