Councillors at next week's infrastructure services committee meeting will consider a report by council business support leader Narelle Barbour outlining the change.
Under existing rules, rural properties inside city limits but outside council water supply boundaries were supposed to be prohibited from connecting to the council's water and wastewater pipes.
That meant out-of-zone homes with water pipes running past their front gates were instead reliant on tanks or water collected from other sources.
However, councillors could in future allow new connections "case-by-case", after considering reports from the council's water and waste services and city planning staff, Mrs Barbour said.
That was despite concerns from council city planning staff, who worried allowing one new connection could create a precedent for other neighbouring properties.
"This may lead to a cumulative effect where significant parts of Dunedin's rural environment gains access to council's reticulated water supply infrastructure."
That, in turn, could lead to requests for more council infrastructure - such as street lighting and sealed roads - and even more intensive development, while discouraging development in urban areas, she said.
However, there were also "health or strategic reasons" for allowing some new connections, as shown in Curles Point and Blanket Bay, where properties had been allowed to connect to address septic tank problems.
Her report also noted 33 properties had been found with "informal" connections to council pipes, either directly or indirectly, by connecting to another home's supply, despite not being in a water zone or paying for water services.
Each was sent an interim invoice late last year, charging them for water supplied during 2010, and those with indirect connections were warned they would need to contribute to the cost of new pipes to rearrange their connections.
Seven properties had since been "formalised" as a result of the council's Water Bylaw 2011 hearings process earlier this year, leaving 26 properties in Dunedin with "informal" connections, she said.
Mayor Dave Cull was among those to make a payment of "several hundred dollars", after he last year admitted receiving free water from an "illegal" water connection at his Otago Peninsula home.
He inherited the connection when he bought his house 15 years ago, and first reported the matter to council staff in 2008, but was told the matter could be resolved only when the council's water bylaw was updated.
The remaining 26 properties with informal connections would also have their connections formalised if they agreed to pay backdated bills covering three years' supply, as well as a share of other costs, such as installing new pipes where required, she said.
A further 232 properties had metered connections, and another 492 were connected and paying water rates, despite also being outside water zones.
The council's water supply zones - included in the council's Water Bylaw 2011 - should be amended to include those out-of-zone properties that were paying, Mrs Barbour said.
The report will be considered by councillors on Tuesday.
