English told The Nation that Australians would be able to buy the state houses if they were registered as community housing providers.
Labour's housing spokesperson Phil Tywford described English's admission as "the latest lurch in the Government's stumbling, half-baked housing policy".
"Bill English should face reality and admit his state house sell off policy has collapsed. The Salvation Army didn't want a bar of it. Iwi leaders said they'd only take them if they got them for free.
"Now Bill English is so desperate to keep his failed policy afloat that he'll even flick the houses off to the Aussies," he said.
The Green Party has also called on the Government to rule out selling state houses to Australia.
"By revealing that Australian businesses have been looking to purchase our state houses at bargain-basement prices, Bill English is also admitting that no-one in New Zealand wants to buy them, and that his grand sell-off plan is in tatters," said Green Party Co-leader Metiria Turei.