Housing Minister Phil Heatley says an affordable housing scheme at Auckland's Hobsonville Point was compromised by the high value of the land.
The Government is pulling out of its Gateway scheme which allowed lower-income first-time buyers pay for a house only and defer payment on the section for most of the first decade.
The scheme was launched three years ago but has been cancelled with just 17 homes completed.
Mr Heatley told Morning Report the high value of the land was an obstacle to making the scheme work.
"You need to accept that because the land value is so very high, it's hard to get properties at a decent cost for anyone because otherwise you end up with a postage stamp section and a very cheap house."
Mr Heatley says private organisatations are better placed to deliver affordable housing programmes than the Government.
He says the Government is reviewing how it can deliver affordable housing at the development on former Air Force land on the upper Waitemata Harbour.
About 3000 properties will eventually be built at Hobsonville Point, which is regarded as a model for well-planned medium-density housing in Auckland.