Corrections Minister Judith Collins has floated the idea of prisoners building their own cells from shipping containers.
Opponents say the proposal is inhumane.
Mr Key said it was only one idea to get around a serious problem due to a lack of prison space.
"It's one of a number (of options)... and I can't tell you if it is likely to take place."
Mr Key said prisons were running at capacity and cheaper options had to be found to house prisoners.
Under the previous government it had cost more than $600,000 to build a single new prison cell.
"That is an outrageous sum of money, that is more than the average cost of the average New Zealand home. I can't see that the public are going to support a situation where prisoners are going to be put in a cell that cost more than their house," Mr Key said.
"So I do think we have to look to lower cost options."
Double bunking and converting shipping containers and putting them in existing prisons would be far more cost effective than building new prisons. The prefabricated shipping containers were used overseas but would not be introduced here if they were not humane, sensible or secure, Mr Key said.
However, prisons did not need to be luxurious, he said.
The prison population is continuing to swell, with 700 added to the muster this year, and tougher sentencing is worsening the problem. Measures such as double-bunking are being implemented.
Ms Collins has asked the Corrections Department to consider the proposal, which she described as "a great idea" and "a lot better than being locked up all day in a cell".
The container cells would "be spartan but humane and clean" and prisoners could help build them.
Rethinking Crime and Punishment director Kim Workman said the idea of putting prisoners in containers was inhumane.
The cost of building accommodation to the standard of the new Spring Hill prison in Meremere, south of Auckland, works out at about $643,000 per bed. Using shipping containers, the cost is an estimated $380,000 per bed.
