Housing New Zealand hopes to revamp 14,500 of its Auckland rental stock and build a further 1420 homes through a partnership with private developers over the next five years.
It is the biggest redevelopment project undertaken by the agency.
The renovation part affects 48 per cent of the 30,600 state rental homes in Auckland.
Housing Minister Phil Heatley said it would give a real lift to communities.
The project aimed to put people in a position where they could improve their circumstances through access to schools, employment and support services, and move on to social or private housing.
About 1600 of "greatest need" applicants waiting for state homes were in Auckland.
"These new and renovated homes will be the right size, in the right condition and in the right place to meet that need."
Mr Heatley said several properties in older state housing suburbs were on large, valuable sections. These would be subdivided and the land made available for social, affordable and private housing.
When rebuilding, the agency would work through the Social Housing Unit, with Maori and non-government social housing providers, to identify opportunities. This would result in the dilution of state housing in some areas.
First off the blocks will be 13ha in Glen Innes North, where 156 shabby 60-year-old homes will be removed and their large, grassed sections merged to allow intensive coverage with new two-storey and four-storey homes.
The aim is to create at least 260 new homes as well as modernise a further 40 homes, said agency general manager assets redevelopment Sean Bignell.
There would still be the same number of social rental houses available in Tamaki at below market rents, he said.
However, Housing New Zealand would reduce its 57 per cent ownership in the area.
About 39 new units would go to non-government social housing providers and 143 sold as private homes. Glen Innes North has 425 residents, including 194 children aged 18 or younger.
Tenants of 156 homes in line for redevelopment have been told they can stay in their homes at least until the middle of next year.
The agency cannot say how the project will be staged until it appoints private developer partners who will manage design, consents and development over the next three to five years.
Tenants said the agency had promised to help them shift to other homes.
Chanel Manga said she had lived in her two-bedroom home for 20 months.
"It is a very cold house and the inside walls have cracks ... I think this old house is moving."
She had fallen down steep steps leading to the laundry and hurt her leg.
Ms Manga's hope was a home with fewer steps and which would be warmer for her 19-month-old-daughter.
A neighbour, Angelica Seamer, said she and her 18-month-old daughter Mereama had enjoyed the big backyard and the lemon trees since moving in March last year.
"I'd love to stay here so I did not have the trouble of moving."
Maungakiekie-Tamaki Local Board chairwoman Leila Boyle said the redevelopment promised to bring more quality, affordable housing to the area.
"However, it is essential that the needs of existing residents - and our local communities - are looked after."