But he said Government officials were willing to negotiate about the cost of the new housing developments because it wanted to maintain the momentum on supplying new homes.
"I think there is always going to be argy-bargy about big bills for infrastructure. Government is struggling to balance its budget, councils are under pressure from it. These are growth pains."
If the impasse between Government and Auckland Council was not resolved, Dr Smith said Government was able to bypass the council and approve the special housing areas itself.
Speaking to reporters this morning, Dr Smith said: "I would remind you that the Government also has the power to create special housing areas without the approval of the Auckland Council if they choose to overplay their cards and demands for money."
He said it was Government's strong preference to work in co-operation with the council, but ultimately if the council refused to budge the override powers could be used.
The minister said the arguments over who should pay for new infrastructure would not derail Government's plans to urgently increase housing supply.
He said just three out of the 80 special housing areas had stalled.
The special housing areas which Auckland Council has rejected are near Huapai, in Prime Minister John Key's electorate.
Mr Key said he supported the proposed developments in Huapai because there was capacity for growth there.
He admitted that constituents had raised concerns about new infrastructure such as roading and schools, and he said they had a "fair point".
Some local residents also felt that Auckland was infringing on their rural communities, but he said Auckland was a growing city and needed more housing.
Asked whether the relationship between Government and Auckland Council had broken down, he said: "I don't think so."
Labour MP Phil Twyford said the Government's failure to invest its special housing areas meant it was "dumping massive costs" on Auckland ratepayers.
"If the Government does not pay its fair share, that burden either falls on the ratepayer or developments get built without the infrastructure they need.
"Two hundred thousand extra people, 80,000 new dwellings and 60,000 extra jobs are planned for Auckland's northwest, but the Government hasn't thought about how these people are going to get to work."
Mr Twyford said Government was "splattering" special housing areas around the city without considering its impact on transport infrastructure.
"Auckland's northwest motorway already looks like a giant parking lot at peak hours. With such big planned population increases in the northwest, SH16 will jam up altogether."
He said that although developers were responsible for laying roads, power and water pipes inside their new developments, big new projects on the city fringes still imposed a heavy cost on local government because they needed to connect these utilities.
