A low-cost housing scheme in Auckland was canned because it didn't make sense to build cheap homes on expensive land, the government says.

Housing Minister Phil Heatley is denying the Gateway project was wound up because Hobsonville's wealthy residents didn't want low-income families living alongside them.

The development is in Prime Minister John Key's electorate and Labour's housing spokeswoman Annette King says he never wanted affordable, or state homes, built there.

"Key himself said in 2002 he would be horrified if state houses were built at Hobsonville, then in 2003 he said it would be `economic vandalism'," she said.

"What a snob."

The previous Labour government launched the development scheme on land previously owned by the Air Force.

The plan was to build 3000 houses, with 500 state homes and 500 low-cost homes in the mix.

The Gateway project allowed low-income families to build houses on state land without having to start paying for the land for 10 years.

When National came to power in 2008 it scrapped the state house part of the project and now it's canned Gateway with only 17 homes built.

"Gateway is cancelled," Mr Heatley confirmed on Friday.

"We're not doing it in Hobsonville or anywhere else in the country because we don't think it's a very good scheme."

Mr Heatley says mortgage rates have dropped significantly since the project was conceived and it's easier now for low-income families to buy their own homes.

"And that land is very, very valuable - if you put an inexpensive house on it you can't make a profit out of it so it's not attractive.

"The only way you can do it is with very small sections and families don't want that," he said on Radio New Zealand.

Mr Heatley says he's looking at other ways to provide cheap houses. He also says community organisations can do it better than the government.