But Mr Little said the announcement "signals the Government is getting out of state housing and setting up a windfall for property developers".
"The Prime Minister is sending thousands of state housing tenants out into the private rental market with a taxpayer-funded subsidy in their pockets. This will just push rents up for all renters," he said, describing it as a "lose-lose" situation.
Speaking to media in the Auckland suburb of Parnell after Mr Key's speech, the Labour leader said the contrast between the two party's policies was "pretty much there to see".
"We want to create jobs, the Government wants to sell state houses - that's the difference between National and Labour now," he said.
"We want to grow the economy, make it good, and share it with everybody, the Government is determined to make it harder and harder, not just for state house tenants but actually for all renters.
"When you do what the Government wants to do, just arm those with state houses now with more subsidies to go into the private rental market, what you do is you push rentals up and you affect all renters, and it's just going to create chaos."
'No long-term solution'
The Government's plan was "not actually fixing the problem", Mr Little said.
"We have got a housing problem, we have a shortage of houses and a shortage of affordable housing. The Government's solution to that is to sell what they've got. It's not actually fixing the problem."
While the numbers of state houses being earmarked for sale looked small, he said, it signalled a "shift by the Government from actually being there to support those that are the most vulnerable and to be a housing provider, to just handing it over to private developers and landlords".
"That's actually not a long-term solution," Mr Little said.
"The reason why the state got into owning houses and renting them to the most vulnerable is because the private landlords and the private market couldn't do the job.
"We're just setting ourselves up for the same mistake again."
He was also sceptical that the up to 8000 state homes suggested by Mr Key as potential properties to be sold would be the total number placed on the market.
"That's today's reduction - then wait for next year, and the year after that, and the year after that," he said, adding that it was "just another sell-off".
Mr Little said the real issue was what happens to the state housing tenants who "can't afford anything else".
The community housing groups and private landlords who might take up the offer to buy state houses managed modest portfolios, he said, and were not "geared up to be like Housing New Zealand - a mass provider of housing across the country, making sure the vulnerable are properly looked after and get the housing they need".
Key should have let voters know, says Little
The Government was revealing a policy that was "never mentioned during the course of the election campaign", Mr Little said, branding it "disappointing".
"Suddenly now after the election, when they think they've got three clear years ahead of them, then they raise it. This is a significant issue, it should have been part of the election programme.
"They knew about this before the election, they raised it now."
He promised Labour would tackle National on the policy and "hold them to account about it".
But Mr Little wouldn't say whether a Labour government would buy back any state houses the current Government sells off.
"Let's see what happens and what they do," he said. "Our position is very clear - we need more houses, new houses, houses that don't exist at the moment. And that's our policy."
A Labour government would build both state houses and affordable homes for first time buyers, he said.
"Just buying and selling houses isn't fixing the problem. When there is a housing need - people can't get into houses, can't get affordable houses - the only answer is to just build more houses," he said.
"Just buying back what we bought and sold, and so on, isn't fixing the problem."
Greens slam 'fire-sale'
The Green Party also criticised National's "fire-sale of state homes", saying it would line the pockets of landlords and property developers, while providing less security to the most vulnerable.
"John Key's speech on the future of so-called 'social housing' today was a pie in the sky wish-list of maybes, that didn't show a coherent plan for the building of a single new home," Green Party co-leader Metiria Turei said.
The plan would "never lead to more people being housed", she said, unless more homes were built to replace the ones that were sold.
"What John Key did say today is he'd like to sell off entire suburbs of state homes to property developers, with no absolute guarantee that those individual developers will have to provide any space for community housing in the future," Ms Turei said.
The plan amounted to a "major transfer of wealth", she said, that "harks back to the 1990s" and was "economically flawed".
"The fact is, New Zealand desperately needs more affordable homes and better services to house the vulnerable, and the best way to build affordable houses is for the Government to step up and do it," Ms Turei said.
"Government can borrow cheaply and achieve significant economies of scale, without having to make a profit off the build. But National is ideologically allergic to the state owning homes, and will sell up, regardless of the consequences."
