Inside the Collingwood flat, the funk of curry that filled the elevator gives way to a scented candle. Lemon grass. East-facing windows reveal Abbotsford Convent, the towers of the old Willsmere Hospital and distantly, the Dandenong Ranges, lost for now in wintry cloud.

The second-hand rug and furniture, a worn, unpolished dining table, an unfashionable lounge suite that manages to remain inviting despite its brown brocade, tell part of the story, as do the books by Camus and Capote, Hesse and Kierkegaard, Winton and Garner, Edith Wharton and Henry James. And then there are the other titles, like Healing Herbs.

Fiona Kranenbroek holds an arts degree with a literature major, and was part way through studying professional writing and editing when she was diagnosed with chronic fatigue syndrome.

She works episodically, but the effort often takes a toll on her health. Since the state government began promoting the idea of less secure tenure of public housing units such as hers, of tenants "incentivised" to work and to transfer to private housing, she says her health has suffered further.

"The stable situation here led me to be able to work and develop skills, and the threat to housing has degraded my health," she says. "Within two weeks of coming here I was employed as an arts worker part-time. In the last four months I have become sicker than I have ever been. If I lose my housing, I, and anyone like me, will find it very difficult to work and contribute."

In its submission to the state government last month, Jesuit Social Services argued that stable, secure housing was the bedrock on which lives were built. Without it, education and employment, and access to health services, were out of reach and families were at risk.

Public housing is set for an unprecedented overhaul under the Baillieu government. Three public documents have set the scene. In March, the Auditor-General declared in a special housing report that the ''social housing'' system was financially unsustainable. In April, the Housing Minister, Wendy Lovell, released a discussion paper, Pathways to a New Victorian Social Housing Framework, declaring ''the status quo is not an option''.

Pathways was accompanied by the canvassing of alternative financial models for the future of the sector by private consultants KPMG.

Critics such as Swinburne University lecturer Terry Burke say that all three reports are flawed in their own way. The Auditor-General's narrow financial snapshot disregards the federal cuts to housing spending and also the social background of people who rely on public housing. The department's report fails to examine how its own policies have transformed public housing into welfare housing. The third paper, he says of KPMG's work, airs impractical financing options.

"This is a problem in Australian social housing. Governments think they can employ private accountancy firms to come up with some magic bullet formula which will allow them to fund public housing without any subsidy. That's just nonsense."

Burke says the history of public housing and the failure of the private market to house low-income earners has been forgotten. Simply, he says, some low-income earners will require a housing subsidy. The real question is what form that subsidy takes and who provides it?

Opposition housing spokesman Richard Wynne says the government seems intent on ''the easy road of selling off housing stock and raising rents on the poorest in our community.''

Workers in the social housing sector - which includes the Office of Housing and low cost accommodation run by non-profit agencies - say the government's thinking points to privatisation, higher rents, short-term leases and less secure tenure for residents, an end to the ''home for life'' culture of public housing.

"Unlike private rental agreements, public housing tenants effectively have open-ended leases," says Pathways, meaning tenants can remain for decades even if their personal circumstances change significantly. Rents are capped at a maximum of 25 per cent of tenants' income. In fact, few pay that much.

The government talks of tenants moving out of public housing as their employment and economic circumstances improve. Expressions like "public housing has become a destination and not a pathway" suggest that long-term tenure will be reviewed.

But the Council for Homeless Persons, in its response to Pathways, says that compared to the general public, public housing tenants have "more disabilities, poorer health, lower levels of education, lower incomes and poorer work histories''. The major barrier to employment was poor health, particularly mental health problems.

A government spokeswoman says over the five years to 2011, more than a third of people leaving public housing moved into the private rental market. "Although the private rental market is tight in some areas, it has absorbed a number of tenants who have moved out," she says.

The spokeswoman added that long-term tenure would continue for those for whom a way out of public housing was not feasible, such as age pensioners, or people with severe disabilities or mental health issues. No decisions have been made about the proportion of tenants who may be able to move into the private market, she says.

Citing the tax review by former Commonwealth treasury secretary Ken Henry, the government argues public housing is unfair, since those who occupy it are manifestly better off than people of similarly modest means who rent privately.

An unemployed couple, for example, receiving a $439 fortnightly Newstart allowance would pay at most 25 per cent of their income in rent. Renting privately would consume 55 per cent of their income. The review said the higher average level of assistance to public housing tenants was not "targeted to need".

But critics reply that it is precisely targeting to greatest need that has helped to create chronic underfunding of public housing. Conceived in the 1930s as a means of housing low-income working families who could not afford private rents, it has transformed into an extension of the welfare system.

Eighty six per cent of residents rely on Commonwealth welfare benefits. Increasingly they depend on disability pensions as well as age, veterans pensions and other benefits. In government-speak, they are people "with high and complex needs" who are economically and socially disadvantaged.

In its response to Pathways, Jesuit Social Services was sceptical at the possibility of large-scale movement into the private sector. "For some, but clearly not all tenants, capacity might be built so that they can enter employment and transition out of public housing. It is important that the expectations about the potential for this outcome are realistic … [age and disability] pensions are the primary source of income for a large majority of public housing tenants. Individuals in receipt of these benefits have been assessed as unable to work."

The Jesuits say strong evidence shows only a very small number of tenants successfully move out for the long term. If the government knows this, its ambitions seem to disregard it, as if it views securing a public housing unit as the battler's version of winning Tattslotto, only with better odds.

"You do wonder sometimes if people know who they are talking about, if they get inside the skin of the very people they are making decisions about, that are really dramatic and life-changing [decisions]," says Jesuit Social Services chief executive Julie Edwards.

Pathways suggests that fairness might improve with regular tenancy reviews so residents would need to demonstrate that they were still deserving of a place. Short-term leases are another option, as the report expressed it: "to reframe some public housing as a time-limited intervention that responds to an immediate need".

Swinburne University's Terry Burke says the government's ambitions defy the facts. "They don't seem to understand their own data, which shows that the bulk of their tenants are on Centrelink benefits, and on incomes which require a full [rent] subsidy.''

Few residents, he says, pay anything like the rent the private sector would demand. ''They are expected to pay 25 per cent of their incomes in rent and for many tenants that's too high, so any discussions about getting a higher rent from them is enormously problematic."

Burke says encouraging tenants to move out may not help if all it means is they churn through homelessness and the social housing sector.

THE government says its problems are compounded since much of its housing stock was built for larger working families, yet its longest waiting list is for single-bedroom units.

"This inflexibility in the system is leading to longer waiting lists … as tenants wait for an appropriate [dwelling]," according to the government's report.

Perhaps too much should not be made of this since the waiting list for three and four-bedroom accommodation remains substantial, at 8068 families. The government's rhetoric, however, creates the impression of a generally dysfunctional system.

Lower rental income is limiting the ability to maintain housing stock, the government says. The auditor's office says that the $56 million gap between rental income and operating costs caused by targeting to greatest need is expected to grow to $115 million in 2015.

Viewing the housing deficit from another perspective, Fiona Kranenbroek says that at present it is almost matched by the annual subsidy for the formula one Australian Grand Prix.

The government's report paints a bleak picture of public housing. The government also asked consultants KPMG to propose future ways of supporting the sector. KPMG suggested public-private partnerships as a way of renewing housing stock, transferring government housing to non-profit agencies, or privatising government housing to lease back from investors.

Burke says none of these options will do much to increase the supply of affordable housing. "Whether it's housing bonds, public-private partnerships, all of them require the ability to service some sort of debt, and with incomes so low, public housing agencies do not have the ability to provide a viable interest repayment on bonds, a viable return to PPPs, unless they are subsidised," he says.

"The big problem for all the states is that the national affordable housing agreement, which largely funds public housing, does not supply enough money, and that started really with the Howard era," says Burke.

"We should just see housing as a merit good in the same way we see education, transport and healthcare, where government puts in a subsidy in recognition there are going to be some people whose incomes are too low to live in the private housing market."

He says there may be a place for shorter-term leases but the debate the government has begun neglects two important things: that federal funding cuts are the core of the problem, and public housing's relationship to the wider housing market. Greater security for private-market tenants, and rejigging negative gearing to foster investment in new dwellings rather than existing housing, have a role.

"You need solutions in the wider housing market to deal with problems in public housing,'' says Burke. ''You can't look to internal solutions, refinancing, to solve the problem if you don't deal with the Commonwealth and the failure of the private sector to supply affordable, appropriate housing."

The government spokeswoman says no decisions have been made about alternative funding, including PPPs, but it is necessary to explore possible financing models.

"We have inherited a public housing system in crisis as a result of the poor management of the housing asset portfolio over a number of years," she said. Despite that, already new houses had been delivered in Westmeadows and Norlane, in Geelong, with more to follow.

Opposition spokesman Richard Wynne responds that both Westmeadows and Norlane were begun when Labor was in office. He says the Baillieu government has contributed no new funding to public housing in its two budgets.

''The financial challenges Victoria faces are the same as those confronting every housing authority in the country,'' says Wynne. ''That's despite the fact that every year in office Labor committed funding above its obligations to the federal government, including a record $500 million in 2009, the largest one-off injection by a state government ever.''

The government spokeswoman was unable to say when the government would outline its plan for public housing. More than 1000 submissions will be reviewed in coming months.

Meanwhile, a sense of unease will persist for many residents.

''We don't know what they are planning. The threat to public housing all started with the Auditor-General's report and it was followed up with the minister making some kind of broad statements that suggested changes and a taking away of security,'' says Kranenbroek.

''I am aware of the waiting list and I am not just worried about my little patch. This place is an incredible asset in terms of what it provides individuals who live here and in terms of a social good. There is a community here and public housing can't be just about warehousing people, this is where people have their lives.''

Ian Munro is a senior writer.