The NSW government says its upcoming state budget, to be delivered on Tuesday, will include funding to establish a partnership with a private manufacturer to supply pre-fabricated or modular housing.
The planned Modern Methods of Construction Innovation Facility will be aimed at producing high-quality housing, reducing build times and cutting costs.
Industry groups have cautiously welcomed the plan, saying it is an important piece of the housing supply puzzle but one that needs to be matched by action to remove other barriers to building.
Community Housing Industry Association NSW chief Luke Achterstraat said modular housing had an important role to play but warned there was no single solution to the state's housing crisis.
"We need to think outside the square when it comes to housing and modular housing, while not the only solution, is a great addition to the policy suite of options," Mr Achterstraat said on Sunday.
Premier Chris Minns said his government was "pulling every lever" to tackle what he called the greatest challenge facing the state.Â
"The way we build homes has barely changed for generations - but the housing pressures facing NSW demand new thinking, new technology and new solutions," he said.
Delivering medium-density homes from existing pattern-book designs - which allow for faster approvals - will be a key focus of the innovation hub.
The manufacturing centre could also be used to provide a range of public infrastructure, including schools and hospitals.
Treasurer Daniel Mookhey described the plan as "smart economic policy", adding the government was building a new industry while also supporting home-building.
NSW has signed up to a federal target that would require it to deliver 377,000 extra homes in the five years to the end of 2029 - a rate of about 75,000 homes annually.
The state is well behind the goal despite improving approval numbers.
Property Council NSW executive director Katie Stevenson said the state couldn't meet its targets without fundamentally changing how homes were built.
"NSW needs more homes, faster, and that means embracing new construction methods that can deliver at scale," she said.
The government has already overhauled state planning legislation, including measures that bypass local councils for large-scale developments.
A two-stage competitive tender process for the modular housing project will open in the coming weeks, inviting domestic and international operators to partner with the government on the facility.
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