"Just another credit line, when this Government has spent the last eight years criticising councils for the amount of debt they've got, that's not the answer."
Mr Little said new models of financing infrastructure needed to be found.
"Our approach is to assist councils with that, and allow them to issue bonds, have targeted rates to repay them. That's about putting the cost to where it should properly fall. But just more debt for councils - it's not the answer to the problem we've got at the moment."
The Government has not yet decided how the fund will be structured but it will require an extra $1 billion in borrowing. The fund will own or finance the infrastructure until the councils receive rates revenue from the new houses.
Mr Key said a number of options were being considered for the management of the fund including a similar model to Crown Fibre Holding which was created to manage the roll-out of Ultra-Fast Broadband.
He signalled the Government was considering another big measure - to establish Urban Development Authorities - for specific areas of high housing need.
They would have the power to override barriers to large-scale development which could include responsibility for planning and consenting.
The new measures would sit alongside other parts of the housing plan: social housing build, emergency housing, special housing areas, an expanded Homestart scheme for first home buyers, freeing up surplus Crown land, Resource Management Act Reform and tax measures announced last year for foreign-based buyers.
Mr Key made his announcement in a speech to the National Party conference in Christchurch.
He said the Housing Infrastructure Fund would accelerate the short and medium term supply of new housing where it was needed most.
Andrew Little said Labour would in the coming week make three housing announcements that would include more detail on its solution for funding infrastructure.
It would also cover UDAs. Asked if Labour favoured such authorities, Mr Little declined to give details ahead of the announcement.
However, the Green Party, which as an memorandum of understanding with Labour, views UDAs as a good idea, depending on how they are structured.
"We would need to see the detail ... if they are focussed on good, green, urban design with affordable houses, then we are all for them," Green Party co-leader James Shaw said.
The Canterbury Earthquake Recovery Authority (Cera) had shown the Government's previous approach to urban development was "very authoritarian and top-down", Mr Shaw said.
"If they take a more democratic approach and actually engage with communities and councils in the design of cities, then I think they [urban development authorities] are a good idea.
Mr Shaw said the infrastructure fund was a step in the right direction but not enough and a commitment to invest in houses was needed.
"It puts councils in a difficult position because it is a loan. I think the idea of making it a loan rather than a true investment fund is so that Bill English can keep his books tidy."
Other political reaction
Auckland Mayor Len Brown welcomed both the infrastructure fund and future establishment of urban development agencies, and looked forward to reviewing the initiatives in detail.
"This is a welcome proposal for all high growth areas, but in particular Auckland where we face significant housing challenges," Mr Brown, who was unavailable for interview, said in a statement.
"We have been talking with the government for some time about further steps to increase the pace of new home building in Auckland and funding for infrastructure has been a key and crucial component of these discussions.
"While we are yet to see the details, these initiatives could contribute to the acceleration of housing supply in Auckland without increasing the burden on ratepayers or adding to council's debt levels."
New Zealand First leader Winston Peters said the $1 billion fund "won't even remotely cope" with the houses needed for new immigrants, let alone the country's natural population increase.
"After eight years of doing nothing, this monetary sum won't make up the huge deficit in infrastructure that National has allowed to build up."
The Government refused to take responsible for and drive a house building programme, Mr Peters said.
"Here after, this government will seek to blame local government for the housing crisis on the pretence that they, and not central government, is responsible for the massive demand that now exists."
Act Party leader David Seymour was critical of the announcement, saying it was designed to generate positive "$1 billion" headlines.
"But it will not actually affect the housing market at all because councils still have to pay the money back...their plan leaves councils with the same problem, just a different lender.
"A more substantial policy would be a rule that gives Councils a share of the GST collected from new construction projects in their territory. That would give Councils the funds and incentives to build infrastructure, without new bureaucracy."
Auckland mayoral candidate Victoria Crone said the infrastructure fund would leave Auckland Council with no excuse not to speed up delivery of infrastructure projects, consenting and the delivery of more homes.
"I see the proposed introduction of a UDA as a failure of Auckland Council's core functions of planning, consenting and support of growth. This wouldn't happen under my watch," Ms Crone said in a statement.
Hamilton Mayor Julie Hardaker said growth councils had been pushing for an infrastructure fund, and she also welcomed the possibility of UDAs.
"The biggest challenge has always been funding for infrastructure. [The fund] is definitely a major piece of the puzzle. If we look overseas to Australia the state governments have large infrastructure funds which have been very successful."
Hamilton had land available now that could accommodate three years of the necessary housing supply, Ms Hardaker said - but it couldn't control how quickly developers built.
"That is another area that we have constantly submitted on - the time frame by which developers can hold consents."
