Prime Minister John Key says plenty of groups are expressing interest in the Government's plans to sell up to 8000 state houses.
The Salvation Army has announced it will not be buying any of the houses up for sale, as it doesn't have the resources.
But Mr Key said the Salvation Army was just one of many players in the community housing sector and the policy will work well.
"If you become a community housing provider you've got the capacity to get income-related rents, you've got a whole lot of other services you provide around these people, and you've got the potential of very important asset over time.
"Look, in the end the Salvation Army will make its own call, and so will Presbyterian Support and a whole bunch of other people."
But the Labour Party says the Salvation Army's decision leaves the government's policy in tatters, and is calling the government to go back to the drawing board.
Leader Andrew Little said the Government must go back to square one and work with Housing New Zealand to find a better solution.
"Turning over 8,000 houses or however many houses to private property developers and others is not an answer to the growing pressure on the need for housing by a growing number of people."
Mr Little said the housing market was out of control, particularly in Auckland.
Labour housing spokesperson Phil Twyford said the Government's policy had been revealed as half-baked.
"The community housing organisations have also said that if the Salvation Army can't make the numbers stack up they doubt that anyone else would be able to make it work.
"So who's left in the market? The property developers and financiers."
The Government is expected to begin consulting with community housing providers and iwi in April, with commercial negotiations starting in June.