Developers are signing up to build social housing for the Government in a move described as a "disaster" because it will take funding away from non-profit groups and could allow the houses to be sold off in future for windfall profits.

One developer has already been approved as a Community Housing Provider, which means they can get access to generous Government subsidies - up to 150 percent of market rent for 25 years for any houses they build. Two more private developers are understood to be seeking registration.

Until now, only non-profit companies like the Salvation Army and the Auckland City Mission have been registered to build and manage social housing, which includes looking after some of the most complicated and needy tenants in the country.

The developers say they bring new skills and experience to a risky, difficult sector. Existing community housing groups, on the other hand, say it is at the expense of non-profit groups who recycle Government funding and grow the housing stock over the long term.

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"We have long advocated that this investment into public housing ... is best done through not-for-profit organisations," said Community Housing Aotearoa vice chief executive Chris Glaudel.

"Over the long run, we don't see the need for affordable homes to diminish. And in 25 years ... what happens to those households in the future?"

The shift towards private developers comes as a shortage of public housing forces thousands of vulnerable Kiwis to instead move temporarily into motels and emergency accommodation.

At last count, 11,612 people and families - including 5889 in Auckland - were waiting to either be granted a public home or transferred to a new one.

In a bid to build more public houses, faster, the new Government has sought to raise up to $2.9 billion so its own Housing New Zealand, can play a larger role in building the homes.

The Government has also withdrawn its offer to provide upfront funding to community groups - a policy which was started by the National-led Government. It instead gives generous yearly funding over 25 years.

This has opened the door for private developers – who are better able to raise their own upfront cash - to register as community groups and bid for the housing projects.

The ASH Foundation is one of the new bodies set up by private developers that has registered as a community group. It gained accreditation last year, and is now negotiating contracts to public housing contracts with the Government.

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Mike Brookes, who is part of the foundation, said building cheaper, affordable housing projects was "inherently risky" and private developers brought unique skills to the challenge.

"We saw that as an opportunity where we could form a community housing provider with good skills and help out – and that is what we are intending to do," he said.

Peter Jeffries, the chief executive of CORT Community Housing, called the Government policy "short-sighted" and a "disaster".

"I am concerned that Government funding will be pocketed by private owners who will sell-off their properties for a windfall capital gain at the end of their 25-year contract. It's a very short-term strategy.

"For a similar amount of Government funding, not-for-profit organisations like ours provide community housing indefinitely."

Housing and Urban Development Minister Phil Twyford defended the funding changes, saying that the upfront capital funding was only available in Auckland under the previous Government. The new rent subsidies were available nationwide, which he said would make sure public housing was built across the country.

Many housing providers had responded positively to the move away from Auckland-only, upfront funding, he said, and were working on proposals for housing projects.

Twyford added: "I understand that Community Housing Providers would like more money to build more houses. Our Government shares their desire to build as many houses as possible."

He said building more state houses was more cost effective than having community housing providers build houses, because in the latter scenario the Crown did not own the houses as an asset.

But there was value in working with the sector, he said. The Goverment's aim is for non-government housing providers to build 1920 out of 6400 public houses in the next four years.

Community Housing Regulatory Authority manager Fiona Fitzgerald said the registration for becoming a community housing provider was rigorous, and applicants had to show they had the skills to care for vulnerable people.

Fitzgerald confirmed that developers would be able to sell the houses in some circumstances. But the Government would ensure the houses were used for public housing "for the length of time they are needed".

Social housing by the numbers

• Govt wants to build 6400 state houses in the next four years

• Housing NZ will build 70 per cent and the remainder will be built by community housing groups

• So far, 867 houses have been built by HNZ and community housing groups - unlike the previous Govt, community housing groups are not given up-front funding for housing projects, but they get generous rent subsidies for 25 years.