A demolished public housing estate in Sydney's inner city suburb of Glebe will be transformed by the NSW government into nearly 500 dwellings.

The development is for social and affordable housing as well as the private market, says Minister for Family and Community Services and Social Housing Brad Hazzard.

“I have no doubt the Cowper Street housing development will be very popular with people eligible for social housing, those key workers who pay discounted rent through the affordable housing component and for private buyers,” Mr Hazzard said in a statement.

“This project transforms what was previously a concentrated social housing area into a socially mixed community and creates the conditions to give many people better opportunities in life.”

Fifteen public housing blocks in Cowper Street were demolished under Labor in 2011.

The government says the new development will mean a nearly 15 per cent increase in social housing on the site.

But Denis Doherty from Hands off Glebe Inc said that selling off half the public land at Cowper Street to private developers is a disgrace and will do nothing to help solve Sydney’s housing crisis.

“Close to Cowper Street is the Wentworth Park Aqueduct where under each arch four to six people sleep rough each night. The Government had a chance to build another ‘Common Ground’ establishment on land it owned in a key area yet they passed it up for a quick and shameful profit,” Mr Doherty said in a statement.

“The Inner City needs affordable homes for essential workers such as nurses, teachers, police and ferry workers yet only a small portion of the development will provide this.”

Construction of the affordable housing will begin in 2016, followed by social housing, with both components set for completion in 2018.