Funding changes mean the Government won't be able to build enough homes to meet the needs of the 10,500 vulnerable Kiwis on the public housing waiting list, housing advocates say.
And there are concerns the current process will only create future ghettos.
They said the Government seemed to be cutting community groups out of the process of building the new homes.
Housing Minister Phil Twyford denied this, saying he wanted community groups to build about 30 per cent of the 6400 new public houses planned for delivery by June 2022.
But Bernie Smith, the chief executive of Māngere-based Monte Cecilia Housing Trust, said Twyford's actions indicated otherwise.
The Government had approved an up to $2.9 billion "war chest" for Housing NZ to build new homes, yet taken away upfront funding to help community groups get projects off the ground.
"The difference with the Labour Government is they are looking at the numbers game rather than looking at building strong healthy communities," he said.
"And some of us are really concerned about the density that they are creating for Housing NZ properties.
"They might be nice while they are new but five years down the track, I think that they are just going to be creating ghettos."
The criticism came as the number of Kiwis on New Zealand's public housing waiting list continued to grow.
As of the end of June, 10,589 people and families - including 4458 in Auckland - were waiting to either be granted a public home or transferred to a new one.
This was up almost 900 on three months earlier.
New Zealand's current total stock of public houses sat at 66,582, with community groups providing 5428.
Tenants in these homes pay subsidised rents of about 25 per cent of their incomes.
Under the previous National Government, Auckland community groups were encouraged to build more public houses with the help of upfront project grants.
However, a number of people in the sector told the Herald this cash largely dried up with the election of the new Government last September.
One project manager, who asked not to be named, said his non-profit had completed a number of projects with the National Government, but future developments were in doubt because it could not get capital funding.
This was highlighted in August, when the Government's Public Housing Plan 2018-2022 confirmed up front funding for community groups had been axed.
The Government instead introduced an "operating supplement" to be paid in instalments once a project was built.
Twyford said he had been told the sector welcomed the change because the previous Government's funding had only been available in Auckland, while the new operating supplement would be available across the country.
He also said the Government viewed community groups as "vital" to helping deliver new homes.
In this year's Budget, the Government had already funded 4480 Housing NZ homes and 874 community houses.
Yet Salvation Army senior policy analyst Alan Johnson warned it would be hard for community groups to build new projects without up-front funding.
While the Government's new "operating supplement" could be fairly generous, community groups first needed to raise a 35 per cent deposit to secure project loans from a bank, he said.
Monte Cecilia's Smith, meanwhile, said community groups were not just helpful as house builders, they also helped create vibrant communities.
Community groups could include providing financial counselling and even helping families finding a pathway to buying their own home.