The Treasury says lowering development costs would have a longer lasting effect on reducing house prices than a major housebuilding project by the state.
The department has analysed the effect on prices of a one-off construction of 10,000 houses versus a 10% reduction in the cost of building a new house.
In advice to Finance Minister Bill English on housing affordability, the Treasury modelled the short and long term effects on prices of 5000 new homes on the outskirts of Auckland, and an additional five-thousand state houses.
Radio New Zealand's economics correspondent said that had the initial effect of lowering prices by between 4% and 6%.
The Treasury says the longer term reduction was 1% to 2% because lower prices would serve as a disincentive to developers to build.
But a 10% reduction in development costs through on-going increases in land supply as well as decreasing other costs for developers would reduce house prices by as much as 9% over the long term.
However, the Treasury does concede, that the reduction in prices from a one-off increase in housing supply could be longer lasting if the development process has been disrupted such as during a credit crunch when finance is harder to come by.