Invercargill Mayor Tim Shadbolt told the Otago Daily Times yesterday he planned to approach the Government with the council's idea of leasing the houses for a peppercorn rent now Pact Group had pulled out.
The city council would ensure the homes were warm, dry and well-maintained.
"I don't think the Government is particularly interested in state housing,'' Mr Shadbolt said.
Labour housing spokesman Phil Twyford said the sell-off was in "disarray'', and should be cancelled.
"It is grotesque to be flogging off state houses to overseas companies when Kiwi families are living in cars and garages.''
Labour has claimed merchant bankers were lining up to take a stake in the houses, using community housing groups as cover.
Invercargill and Tauranga are test cities for the state house sell-off.
The stated objective is for community-based organisations to take over the houses and provide a range of services and support.
In an earlier blow, the Salvation Army ruled out bidding for any of the country's state housing stock.
Labour's Invercargill candidate, Dr Liz Craig, of Dunedin, said it appeared Pact had looked at the numbers and they did not stack up.
"The Government needs to go back to the drawing board with its social housing policy and instead of selling them off start investing again in our state houses, so that all of our families, especially our children, can access warm, dry, affordable homes in the most efficient way possible.''
Dr Craig said she did not support the idea of local councils taking over state housing, as only the Government had the financial clout to maintain the state housing stock.
Political commentator Colin James said Pact's decision was embarrassing for the Government, but he believed it was too early for opponents to celebrate.
Mr James said he understood the Government was not keen for local councils to become involved in leasing or owning state houses, but at this point, it was possible.
Invercargill-based New Zealand First MP Ria Bond said Pact pulling out was a "devastating'' blow for the Government, but she respected the charity's decision.
"These houses were paid for by the taxpayer and should remain in the hands of New Zealanders,'' Ms Bond said.
Finance Minister Bill English, who is also minister responsible for Housing New Zealand, and Social Housing Minister Paula Bennett announced the news yesterday.
"Pact was the only party invited to submit a proposal for the Invercargill transaction, so we have put this procurement process on hold until we can assess other options,'' Mr English said.
In March, Pact was named as the sole organisation expressing an interest in the 348 state houses.
Pact management was unavailable for comment yesterday, and chairman Bill Dunbar declined to comment.
In a statement, Pact management said it had been a difficult decision, but "we believe that this was not the best opportunity for Pact to pursue at this time''.
Main points
• Pact pulls out of Invercargill state house sell-off.
• It had been the sole prospective bidder.
• Invercargill and Tauranga test cities for new state/social housing model.
• Pact is a Dunedin-based mental health and intellectual disability provider.
• Government to assess other options.
