State house tenants would face eviction if a review decided they no longer needed public housing, under a plan proposed by Housing Minister Phil Heatley.

His proposal follows a report from the Housing Shareholders Advisory Group, set up in April, which criticised Housing New Zealand's "homes for life" policy because it deprives the most needy.

About 22,000 people, or 32 per cent of state house tenants, have been in their houses for at least 10 years.

Yesterday, Mr Heatley said some tenants no longer needed state homes because their circumstances had changed - their incomes had risen, or their children had grown up and left home.

He is proposing that new tenants be told their tenancies will be reviewed every three, five or 10 years to make sure they are still the right people for that home.

If not, the house could be transferred to the non-profit sector such as the Salvation Army, or the tenants could buy the house, move to a more suitable home, or be evicted.

"If there are no other options and they are still in need, then of course they would stay in the state home," Mr Heatley said.

The tenancies of the most vulnerable and elderly would not be reviewed, but other current tenants could also face the checks.

"Certainly the 6000 tenants who already pay a market rent, meaning they could rent the house next door, may possibly go on to reviewable tenancy some time in the future," Mr Heatley said.

There were 2700 people in four-bedroom state houses with only one or two people living in them, he said, and more than 10,000 people in state homes who were in better circumstances than people on the waiting list.

"There are 4000 on the waiting list in significant housing need."

He said there was now no formal system of tenancy review, although tenants could voluntarily leave a state house.

"When there are people on the waiting list who are desperately needy, and others in state homes earning $90,000 a year, we can't go on with a 'house for life' mentality."

Labour Party housing spokeswoman Moana Mackey said reviewing tenancies would not increase the number of state houses.

"If we don't start building a lot more houses, the situation is only going to get worse."

She questioned the value of reviewing tenancies because Housing NZ tried to move people on where it was appropriate to do so, and tenants usually complied.

Mr Heatley is also looking at creating a transitional subsidy between the accommodation supplement, worth about $4000 a year on average, and an income-related rents subsidy, worth about $8000 a year.

More than half the 480,000 households in private rental accommodation got subsidies, and the cost of the accommodation supplement rose 18 per cent to $1.2 billion in 2009.

Mr Heatley said Housing NZ would change its stock dramatically over the next 10 years as it had too many three-bedroom homes and not enough one- and four-bedroom homes.

The Government could transfer as much as 20 per cent of the $15 billion housing stock to the community sector.

He hoped the Cabinet would consider the recommendations before Christmas.

Changing the rules:
* New tenants could be subject to tenancy reviews every 3, 5 or 10 years to make sure they still qualify for the home they are in.

* Reviews could also eventually cover current tenants, though the elderly or most vulnerable such as those on invalid benefits would be exempt.

* The aim is to change Housing NZ's "homes for life" mentality and focus more on the most vulnerable.