Lambert planned to build on residential-zoned land at 380 South Rd, which he bought from the council in 2015.
He wanted to provide quality accommodation for tenants that helped the city and generated a modest return.
However, the development breached Dunedin district plan density rules, opening the door to affected party submissions.
That led to KiwiRail lodging opposition, citing concerns including the site's location just 9m from the main trunk railway line.
KiwiRail asked for an acoustic report, which Lambert had to pay for, which recommended extra sound insulation for each home.
Lambert said he had already planned to include acoustic insulation - including double-glazing, permanently sealed windows and mechanical ventilation - that was "way above" building code requirements, and a marked improvement on the area's existing housing.
But the acoustic report wanted more, including thicker double glazing Lambert said was "over the top" and would require specialist framing, increasing costs.
The council also worried about the development's effect on stormwater and wastewater pipes, but the parties disagreed over how to address the concerns.
Together, extra measures would have added about $50,000 to the cost of each house, making the affordable development unaffordable and prompting Lambert to withdraw his consent application earlier this month.
I'm trying to do the right thing, but to come up against such bureaucratic insanity is just doing my head in.
He now planned to start again, by seeking consent for two homes on the site, which would comply with density rules and avoid the need for submissions.
The second generation district plan (2GP) could eventually allow two more homes on site, but would also set higher sound insulation standards for land near railway lines.
Consultant planner Shane Roberts, in his report to last year's hearing, said Lambert's affordable housing plan was "admirable", but had failed to demonstrate how noise issues would be adequately addressed.
Council resource consents manager Alan Worthington, contacted this week, said the council took the need for affordable housing "seriously" but could face a legal challenge if it simply ignored submitters' concerns.
The additional noise insulation measures faced by Lambert were not common, but had been imposed in the past, and were used to protect against port noise in parts of Port Chalmers, he said.
The 2GP proposed extending such standards to other sites, near railway lines and motorways.
They were "quite simple" to comply with, albeit at a cost, but Lambert had opened the door to submissions by trying to progress a non-complying development, he said.
A spokesman for KiwiRail said it was the council, not KiwiRail, that "imposed" noise insulation requirements on Lambert.