But Community Services Minister Pru Goward said the government must balance the needs of Millers Point tenants against those of 57,000 families on the social housing waiting list.

The department will make "Every effort to assist tenants to find a property close to their preferred area.": Pru Goward. Photo: Wolter Peeters

The government will sell 300 public housing properties at Millers Point, The Rocks and Gloucester Street, saying maintenance costs and rent subsidies are too high and the proceeds will be reinvested into the social housing system. It is expected to raise hundreds of millions of dollars.

A social impact assessment into selling public housing at Millers Point, commissioned by the government and carried out last year, said some proceeds should be used to build new social housing in and around the suburb, especially for older residents.

It warned relocated residents may experience "ongoing negative impacts of stress and poor health outcomes", especially the elderly, and those with mental health issues or long-term connections to the area.

More than 40 per cent of residents are aged 60 or over and some tenants have links to the suburb stretching back five generations.

The report, by Cred Community Planning, also urged the government to help provide new affordable housing for key workers in Millers Point. It noted a fall of up to 45 per cent in private low-income rental stock in the City of Sydney between 2006 and 2011.

The government rejected the recommendations, saying funds generated by the sale would be spread across the social housing system and older people would be encouraged to "build connections in their new communities". It said the development of affordable housing at Millers Point was the City of Sydney’s responsibility.

A draft of the report was finalised earlier this year but it was not released publicly until Wednesday, the day the government announced the sale.

Ms Goward said the department would make "every effort to assist tenants to find a property close to their preferred area" but would not guarantee they can stay in or near Millers Point.

University of Sydney urban planning professor Peter Phibbs said it made sense to reinvest money from the sale into the social housing, but "the implementation strikes me as clumsy".

"It seems to be driven by people trying to get their hands on some quick cash rather than thinking about things from a policy perspective," said Professor Phibbs, who peer reviewed the consultants' report.

He said moving elderly residents away from their communities and social ties was "not a very humane policy", and was inconsistent with the government's own ageing policy.

Sydney lord mayor Clover Moore said the council's ability to reduce housing prices was limited without state or federal intervention.

"It is extraordinary that the state government is now claiming they don’t see addressing housing affordability as either a responsibility or a priority," she said.

Terry Tooher, 65, has lived at Millers Point for more than 40 years with her husband Colin, who has lived there since he was a child.

Ms Tooher said the couple would resist attempts to relocate them, adding "we are concerned about older friends and neighbours, where we could go and [if we can] go as a group to give each other support", she said.