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Provided Local Government Minister Nanaia Mahuta signs off on the transfer of the 3.6ha Jopp St site from the Queenstown Lakes District Council to the trust, construction of 65 homes could begin in a year's time.
The council unanimously approved the transfer at its full meeting on Thursday.
The land is held in trust by the council for "public utility" purposes, but the housing trust wants to build five one-bedroom units - of which at least three would be allocated for senior housing - 20 two-bedroom homes, 36 three-bedroom homes and four four-bedroom homes.
Arrowtown ward councillor Scott Stevens said the land had other potential uses, such as a park and ride facility, or it could be sold to a private developer for $11million.
However, that would result in residential sections priced at more than $500,000, which the township did not need more of.
Affordable housing was the "best use" of the land, Cr Stevens said.
Under current zoning, the land - part of which used to be an oxidation pond - is valued at $3million-$4million.
Gaining resource consent for a development of the scale intended by the trust would increase its value to $10million-11million.
Mayor Jim Boult said an affordable housing development would bring more young families into the township who would otherwise struggle to afford to live there.
In line with staff advice, councillors rejected a proposal by the trust to sell 10 of the resulting house and land packages on the open market to help offset development costs.