THE state government is rushing to prepare laws to create a development authority with sweeping powers to compulsorily acquire and rezone privately owned land for resale to developers.

With Sydney's population set to grow 40 per cent to 6 million in the next 25 years, the government has decided it needs a metropolitan development authority to buy privately owned land near rail and bus routes for medium- and high-density housing.

Legislation for the new authority, believed to be the first of its kind in Australia, will be introduced before June in an attempt to increase housing construction rates, which are the lowest on record even though the city's population is growing at the fastest rate since the 1960s.

Cabinet is still fine-tuning details, including the contentious issue of the amount of compensation paid to landowners whose properties are compulsorily acquired by the government for resale.

While government departments such as the Roads and Traffic Authority have the power to compulsorily acquire land, they can do so only when it is used for a public purpose.

In contrast, the metropolitan development authority would allow compulsory acquisition of land for private companies to construct and sell housing for profit.

A spokesman for the Planning Minister, Tony Kelly, said the move was about ''driving urban renewal at key strategic sites throughout Sydney''.

While the proposal is likely to be contentious, developer groups say it is the only practical way to meet the housing construction targets contained in the principal planning document for Sydney, the Metropolitan Strategy.

It says Sydney needs 26,000 new homes a year but only 14,000 are being built, a shortfall developers say is largely due to the difficulty in obtaining suitable sites.

As well as acquiring land, the authority will decide which areas should be included in new areas for housing and employment and then ''partner with councils'' to rezone them.

The plan for the authority follows the release of draft legislation two years ago by the former planning minister Frank Sartor to give the government powers to compulsorily acquire land for urban renewal where there was a ''net public benefit''.

The proposal lapsed after a public backlash, and developer bodies are keen to avoid this happening again.

One lobby group, the Urban Taskforce, wants the government to pass on to landowners the full increase in value that results from rezoning.

''Landholder compensation must be valued based on the rezoned value of the land following the granting of the final development approval in connection with the urban renewal project,'' the taskforce chief executive, Aaron Gadiel, said in a letter to Mr Kelly.

He said the government should look at the British model where, for 10 years after compulsory acquisition, a landowner is entitled to claim compensation for any increased value of the land from rezoning or other planning approval.

A spokesman for Mr Kelly said this was under discussion. "In relation to issues such as the model of compulsory acquisition, consideration will be given to models from other jurisdictions and to submissions from industry.''

The head of the Property Council, Ken Morrison, said the authority was vital if Sydney was going to house its swelling population as the vast tracts of industrial land used in the past for development had largely gone.

''People think we are talking high rise with Chatswoods everywhere. We're not … there will be a few locations like that, but in most cases it will be medium-density form with five or six storeys.''

Stephen Albin, the chief executive of the Urban Development Institute, a developer group, said while landowners should receive some compensation for increased value from rezoning, they should not receive it all.

''Developers are taking the risk … these landowners are not taking risk. Government has decided for the good of the city, for the good of the community, development must occur.

''The rationale behind the authority and the compulsory acquisition provision is community benefit.

''It's the same as acquiring land for a road or a railway.''