From today, turning down a state house more than once without good reason will result in removal from the waiting list for up to three months.
The stricter policy for prospective tenants was promised by Social Housing Minister Paula Bennett last year.
The 4500 applicants on waiting lists nationwide will also have to consider moving further away from their place of work under the new policy.
In the past, applicants for a state house could choose just one suburb they wanted to live in. They could also turn down three offers of a house for any reason.
Applicants now have to nominate at least three suburbs they are willing to live in. And if they turn down more than one house, they could be removed from the social housing register for 13 weeks.
"If ... we give [applicants] a house which is perfectly suitable for them, then we expect them to take that house up," Mrs Bennett said.
She said people wanting to be settled in central Wellington would now have to consider living in Lower Hutt or another neighbouring location.
In 2015, 10,000 state house offers were made to people on the waiting list. Of those, 3453 were declined, and 414 were turned down for "unacceptable reasons" including a request for a larger backyard or a garage.
There were also 500 people who named only one suburb to live in.
The new rules would not apply to Auckland-based applicants who turned down an offer outside of the city. Under separate policy announced last week, Aucklanders waiting for a state house would be encouraged to move to vacant homes in the regions.
If ... we give [applicants] a house which is perfectly suitable for them, then we expect them to take that house up.
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"It's quite different when we are asking people to move, potentially, hundreds of kilometres away," Mrs Bennett said. "We wouldn't penalise them for turning down [an offer] if they lived in Auckland and we offered them one in South Waikato."
The Labour Party has described the policy as an attack on the vulnerable, and said the reason people were turning down state houses was because they were damp or mouldy.
In announcing the policy in October, Mrs Bennett said applicants had turned down houses because of birds chirping in nearby trees, because a backyard was too small for a trampoline and because they disliked the colour of a door.
When challenged by reporters, she said these claims could be supported by officials. Housing and social development officials provided evidence of the first example, but said it would be too time-consuming to dig out the other examples, which were buried in individual files.
• Applicants for a state house could nominate just one suburb they wanted to live in.
• Applicants could turn down three houses for any reason.
• Applicants must nominate at least three suburbs.
• Turning down more than one house for "unacceptable" reasons will result in a 13-week stand-down.