Premier Dominic Perrottet says Labor's plan to create a "one-stop shop" for social housing would increase bureaucracy rather than actually delivering more homes for those in need.
The plan also received a mixed response from industry representatives and the Greens, who welcomed bringing public housing services together under one roof but noted more needed to be done to address supply shortfalls.
Opposition leader Chris Minns revealed plans on Monday night to merge the Land and Housing Corporation, Aboriginal Housing Office and Department of Communities and Justice Housing into one giant entity called Homes NSW, should his party win the March state election.
The state bodies manage more than 131,000 properties across the state.
Mr Minns said there was too much red tape and hurdles in the system, with more than 50,000 people on the waiting list for social housing in NSW.
"We have a housing crisis that needs urgent attention," he said.
"The creation of this single agency will ensure decisions are made, implemented and evaluated in the one place."
The premier dismissed Labor's policy and said his government would instead build more social homes in NSW, which already outnumbered those in Queensland and Victoria combined.
"More public servants is not the answer - constructing homes is the answer," Mr Perrottet said.
Greens MP Jenny Leong said bringing the responsibility for social housing under one new department would stop the buck-passing.
But it wouldn't deliver a single new public, social or affordable home for anyone.
"Unless there is significant investment in maintenance and a commitment to invest public money in building more public, social and affordable housing, then nothing will change," she said.
The NSW branch of Australia's peak social housing body agreed.
"The problem is not just too much bureaucracy, it is too little government funding," Community Housing Industry Association NSW chief executive Mark Degotardi said.
The Urban Development Institute of Australia NSW called for more development approvals to bring down costs and ease pressure across the sector by increasing overall supply.
The Land and Housing Corporation, which is responsible for building and maintaining social housing, manages a portfolio of more than 125,000 properties while the Aboriginal Housing Office controls about 6000 homes.
Meanwhile, the communities and justice department deals with tenants and manages the Housing Register wait list.
Shadow housing minister Rose Jackson described the split as "ineffective, expensive and dysfunctional".
"Tenants and those who support them regularly find themselves bouncing between departments and falling through cracks trying to get basic issues resolved," she said.
"Homes NSW will be a one-stop shop that will end the buck-passing and ensure people are getting into homes."
The Aboriginal Housing Office would sit within the new agency but would maintain distinct leadership, self-determination and control for the delivery of Aboriginal housing by Aboriginal people, according to a statement on the proposal.