The New Zealand government and Christchurch City Council will spend $NZ125 million ($A116.56 million) on encouraging cheaper housing to be built in the city desperately short of such accommodation.
A housing accord, announced on Wednesday, will see the government invest $NZ75m and the council $NZ50m into an entity which will encourage private investment.
As part of the deal, the government will build two villages totalling 180 houses on the council-owned land on the former Sydenham School site and in Welles Street.
A group will also be set up that will report monthly on the progress in house building in Christchurch and what effects rules are having on the residential rebuild.
"Many residents are living in dire circumstances, forced to pay unrealistically high rentals for accommodation, some of which is substandard," said Christchurch Mayor Lianne Dalziel.
Following the deadly 2011 earthquake the city's acute shortage of affordable housing would only be solved by the government and council working together, she said.
"From our perspective, it is not acceptable to have families living in garages because that is their only option. The accord is very significant in that it acknowledges the seriousness of the current housing shortage in the city and proposes a way forward."