The old Outlaws building was completely fenced off so as to prepare for the exercise.
Neighbours and surrounding residents were notified beforehand with one resident who lived directly next door saying he was relieved it had been called off.
"I've got a young kid and a dog and I was worried about all the smoke, so I'm quite happy it's not going ahead anymore."
Another resident who lived across the road said she was also happy it had been called off.
"I don't like the idea of a lot of smoke hanging around so I'm happy it's been cancelled," she said.
Kennedy said earlier this week the postponement was due to the house "not being ready" and more work needed to be done.
However, the call was made on Wednesday to cancel it completely because it was no longer workable in the "time frames going forward", Kennedy said.
"This happens, once in a million, and it is disappointing, but we're hoping to find another house in Hawke's Bay," he said.
The point of the live exercise was to provide "vital" training for volunteer firefighters who would eventually be faced with the real thing.
"We basically start off with small exercises where volunteers will go in as groups and the house is burned down throughout the course of the day. It's monitored at all times by experienced firefighter teams and appliances are also on site throughout."
Kennedy said although the operation wasn't going ahead, it was still important for members of the public to practice their safety drills, should they need to evacuate due to a fire.
"The months are starting to get colder as well, so it's important to check your smoke alarms are working along with electrical appliances such as electric blankets."