Kainga Ora is replacing five older state homes at 40, 42, 48, 53 and 55 Albertson Ave with nine new homes.
However, the Otago Daily Times understands the next stage of the project has been put on hold.
This means a site which used to host a further six houses has been left undeveloped.
Kainga Ora regional director Kerrie Young said at 2, 4, 6, 8, 10 and 12 Albertson Ave, six older state homes were demolished to make way for 11 new homes.
"However, the redevelopment of these sites is under assessment while we confirm our social housing projects for the next two years, with a focus on priority locations and best value for money."
West Harbour Labour Party branch chairman Bill Southworth said the situation was "hugely damaging" to the tight-knit community.
"It’s scandalous, really.
"At a time when demand for new housing has never been higher, the government seems to be backing away from doing the right thing."
He was particularly concerned about what would happen to tenants in the now-demolished properties.
"There was some expectation, I think, that they could return to the new homes once they were completed, but I imagine they would be in limbo now."
Dunedin MP Rachel Brooking said it seemed strange that a project that had such strong community support could be cut-off mid-stream.
"I'm very disappointed. It’s another example of stopping a project that was needed."
Ms Brooking said the Albertson Ave area had very close ties to the nearby primary school, which had a "wonderful community atmosphere".
Housing Minister Chris Bishop said specific developments were operational matters for Kāinga Ora.
"At any point in time there will be a range of projects being rephased or paused or not proceeding due to a range of factors.
"That said, Kāinga Ora’s existing build programme remains ongoing and they are on track to deliver their contracted additional social housing places as funded in Budget 2023."
The government has funded 1500 additional social homes, which would be delivered by Community Housing Providers, Mr Bishop said.
“Kāinga Ora has a new chair in Simon Moutter and a refreshed board in place. Their first task is to present a Kāinga Ora turnaround plan to ministers by the end of the year, which focuses on returning Kāinga Ora to financial sustainability and eliminating losses."
