Public housing towers at Waterloo in inner Sydney, which are home to about 4,000 tenants, will be knocked down and rebuilt as part of plans for a new metro station in the suburb.

The New South Wales Government has chosen Waterloo as the 31st Sydney metro station, despite a push by Sydney University to have a station built on its campus.

The towers are set to be rebuilt as a mixture of public, affordable and private apartments spread across 17 hectares of government-owned land, which will be re-zoned and redeveloped over the next 15 to 20 years.

The public housing tenants will have to be relocated while the towers are rebuilt, starting in mid-2017.

NSW Premier Mike Baird said those who wanted it would be guaranteed a place in the new buildings.

"Those that remain in public housing, if they want to come back to a new dwelling, they would be given that opportunity," he said.

Tenants would be accommodated in the immediate area wherever possible during the transition, he added.

"I can genuinely tell you that as we sat and looked at this, the most compelling thing for all of us was that we have an opportunity to help them," Mr Baird said.

"I don't think any of us would want them sitting in run down 1950s-style accommodation when we have the ability to upgrade them and deliver a better quality of life."

NSW Transport Minister Andrew Constance said there were a number of reasons why Waterloo was the best choice for a new station.

"It's going to see a transformation of a part of Sydney which is in need of change," he said.

"The station at Waterloo will make this rapidly growing part of Sydney more accessible and take the pressure off Redfern and Green Square stations."

Mr Baird said the station would also help bring new jobs to the area, and the redevelopment would boost housing supply close to the city.

"The metro station creates the opportunity to transform Waterloo and make it a better place to live for future and existing residents, many of whom are amongst the most vulnerable people in New South Wales," Mr Baird said.

The NSW Government said the community would be consulted about the future of the neighbourhood to help develop more detailed precinct plans for new parks, homes and community facilities.

An environmental impact statement for the new metro station is expected to be released in mid-2016.

Transport for NSW is also looking at improving public transport at Sydney University in the wake of the metro station decision, through upgrades to Redfern Station and improved pedestrian links through Redfern and Darlington.