He suggested existing Housing New Zealand properties could be transferred to a special urban development entity for such urban redevelopments.
His first objective was that people who needed housing support from the Government got it whether it was with Housing New Zealand or a community provider.
"The experience of countries like Australia and the United Kingdom is that having non-government organisations involved in social housing, alongside the Government, is a better way of doing things."
In his state of the nation speech to an Auckland Rotary audience, Mr Key said the Government at present paid $700 million a year in subsidies for income-related rents
The aim was to increase the number of subsidies paid for income-related rents from the 62,000 now to 65,000 by 2017-18 at a cost of $40 million.
The subsidy used to be paid only to Housing New Zealand, which has about 68,000 properties but last year it began paying it to approved social housing providers. About 300 would be offered shortly to community housing providers in Auckland.
The subsidy is the difference between 25 per cent of the tenant's income, which the tenant pays, and the market rent.
Mr Key said locally based providers were closer to their communities and could more responsive to the needs of tenants, such as in the mental health, disability or budgeting areas.
Housing New Zealand would continue to be by far the biggest social housing provider and he pledged that by 2017, it would provide at least 60,000 properties.
Mr Key said that around 5000 tenants who were paying market rents to Housing New Zealand or near market rents would have their tenancies reviewed.
"People will be encouraged and supported to move into other housing if they are in a position to take that step," he said.
He also wanted Housing New Zealand to accelerate its reconfiguration of properties to meet future demand, 30 per cent of people on the waiting list required a one-bedroom home but they made up only 9 per cent of Housing New Zealand properties.
Mr Key also set out a broad outline of further plans for provision of affordable housing by increasing the type of major urban redevelopment such as that happening at Tamaki.
"A large redevelopment could involve existing properties being transferred out of Housing NZ ownership and into a special urban development entity," he said.
"But I want to emphasise again that the total number of social housing places across Auckland will increase as a result of what we are doing."
He also talked about selling state houses with tenants to be guaranteed tenancy for the duration of their need.
"Community housing providers may want to buy properties on their own or they may go into partnership with other organisations who lend them money, contribute equity or provide other services," he said.
"We might not get the book value of the properties but that's only because under accounting rules, the value of houses in the Government's books is based on a theoretical sale in the open market and that's not what we are doing."
Mr Key also said the Government had commissioned a strategic review of Housing New Zealand.
Social housing minister Paula Bennett has asked for a higher priority to be given to dealing with the needs of homeless and those sleeping rough.
