The application for Ngongotahā's Special Housing Area, which would have seen up to 80 new homes built, has been declined by the Minister for Housing and Urban Development.
In a statement on the Rotorua Lakes Council website, Rotorua mayor Steve Chadwick described the decision as both frustrating and disappointing.
"It is extremely frustrating the application has been declined. The people of Rotorua are being denied housing at a time when they need it the most.
"We have the second highest rate of registered homelessness in the country and we are bitterly disappointed the Minister declined this application."
Initial plans for the 16ha site, launched in March 2018, included 190 dwellings but an update in June said up to 80 lots would be created. Developer Martin Schilt said the reduction was due to time constraints.
Schilt aimed to expedite the development under the Special Housing Areas Act which expires next month. He filed the application on April 30.
The SHA process was expected to take three months but there were delays following flooding in Ngongotahā which meant the Ministry of Housing and Urban Development asked Schilt to get extra reports on stormwater and flooding.
Following the Minister's decision, Chadwick said it was never Schilt's intention to build on flood-prone land.
"The intent was to provide much-needed housing for our community and the SHA process through central government was designed to enable housing.
"While we appreciate the complexity of the application, we consider the second step of the SHA process would have appropriately managed the risk associated with flooding."
On the wider issue of housing supply, Chadwick said the council would continue to work with central government to explore further opportunities to increase housing supply.
"Our communities have high expectations that council will work with anyone who can help address the housing shortage we are currently experiencing in Rotorua."
If it had been approved, the development would have been the first and only Special Housing Area under Rotorua's Special Housing Accord.