The Productivity Commission is not ruling out recommending changes to the Resource Management Act as part of a widespread review of urban planning.
The government has asked the commission to review urban planning rules and processes.
Finance Minister Bill English wants the commission to go back to first principles and devise a more flexible system.
Commission chairman Murray Sherwin said its previous work had identified problems with the current system.
"Our first inquiry back in 2012 on affordable housing identified the issue around access to land. We've subsequently done work in local government governance and regulatory performance. The latest one was on the impediments to the supply of housing.
"In each of those we identified some issues around the interaction of the key pieces of legislation, particularly the RMA, the Local Government Act and the Land Transport Management Act, all of which have different requirements for local government and get in the way of smooth operation."
Mr Sherwin said none of the current laws, including the RMA, were set up for urban planning.
"What you're trying to deal with, particularly as city's become more compact. You've got externalities, you've got impacts from one person's actions having an influence on the next person, on the neighbour."
"So it's trying to work out those really quite complex interactions, between neighbours. You know basically where property rights stop and start.
Mr English said the government wanted urban planning rules that helped keep housing affordable, and helped the productivity of the wider economy.
He said many parts of the system were outdated and unwieldy and because international best practice had moved on, so must New Zealand.
Local Government New Zealand has welcomed the decision. It said there would not be a council that did not support the proposition of a review of current government legislation.
Vice-president Brendan Duffy said the 78 councils were left with the massive task of interpreting the urban planning legislation.
"I'm sure he'll find that we in local government would support the opportunity for a fresh look at how we evaluate and deliver on the policy," he said.
The commission will release a draft report next year, before delivering its final report on the best system for land use allocation to the government by December.