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The corporation will, from September, begin a two-year project on two of its worn units in Maitland St.
Work on the back block will take 10 months, after which work will start on the front building.
It will include security improvements, concrete repairs, a redesign and replacement of roofs, gutters, window joinery, external doors, an upgrade of all interiors, kitchens, bathrooms, laundries, floor coverings, curtains and ventilation, as well as upgrades to landscaping, driveways and paths.
This includes the replacement of asbestos cladding.
Resident Matthew Robertson, who has lived in the building for 11 years, said the department began speaking to residents last year about the work.
The upgrade was well overdue, he said.
"The maintenance hasn't always been reliable.
"I think they are doing some work on the plumbing, which really needs to be done.''
It was "not a great neighbourhood'', so some people might use the opportunity to stay in their new houses if they were transferred out of the area.
Several other residents, who did not want to be named, said the department had given plenty of notice and the building was in need of an upgrade.
As of March 31, Dunedin's state housing waiting list was 156.
It has been rising since September 2016 when it was 44.
Salvation Army Dunedin ministry leader David McKenzie said while it was important to ensure houses were healthy, relocating the tenants would further strain Dunedin's housing problems.
"We know that Housing New Zealand is rebuilding and renewing current sites, so we're going to lose a few houses on the way through.''
High rental prices and low housing stock were putting great pressure on the city, he said.
"There's the odd person who is still living in a car. It's relatively short-term usually. Someone this morning this said they were doing so for a couple days while they got things together.''
However, there were "no easy answers'' to Dunedin's housing problems, he said.
Housing NZ southern area manager Gill Brown said it "engaged fully'' with the 25 tenants to ensure they understood what the work would mean for them.
"The feedback we've received has been very positive during this process and we are happy to have arranged alternative housing for all tenants that meets their needs.''
All temporary accommodation was in social housing around the city.
The cost of the work was not yet confirmed.
"This project will ensure tenants will be living in modern, warm, dry and fit-for-purpose homes.''