She said mould was rare in Housing New Zealand properties and insulation contractors had not made her aware of any other problems.
The house is in a part of south Dunedin with a high water table and Ms Barnett said the land under and around the house was often wet.
Ms Milton said the ground cover should solve the moisture problem under the house.
Ms Barnett said she had been asking for insulation for ''at least'' four years.
Previous contractors had told her they could not insulate under the house because it was too low but, during the latest assessment a few months ago, they decided it could be done.
She said they made an appointment to do the work but when they arrived they discovered the mould and did not do the work. Nobody told her what was going on.
''It looks like there is progress but when you all go away, will it continue or will it stall again?''
Ms Milton said when ceiling insulation was installed in 2004, the floor was thought to be too low to install insulation.
''In hindsight, we should have had the space re-inspected earlier to see if underfloor insulation was possible. We apologise to the tenant for the delay.''
Ms Barnett said she had to move out of her bedroom because the smell of damp and mould was so strong and her windows got a lot of mildew on them.
After repeated delays in dealing with the mould, she contacted Dunedin South MP Clare Curran, who contacted The Star and brought Labour's associate housing spokeswoman Poto Williams to look at the house yesterday.
Ms Williams said the problem was a symptom of the lack of a scheduled maintenance programme by Housing New Zealand, which meant problems were not identified and got worse.
Ms Milton said most of the 1450 HNZ properties in Dunedin had been insulated, with 360 done in the past couple of years.