Reacting to consultation on the housing and planning delivery grant, which began last week, the Local Government Association (LGA) said measures are needed to tackle land banking.
LGA chairman Simon Milton said: "Financial incentives for councils to identify building sites will free up land, but densely populated areas should not be penalised because they have less land."
The DCLG's latest grant regime is backed by £510 million of funding. It replaces the planning delivery grant as an incentive to local authorities to develop detailed plans for more homes.
Councils with five and 15-year plans for growth will be rewarded with funding. They could receive an extra £1,100 per home, rising to £5,000 in 2010-11, if they achieve growth of more than 0.75 per cent of total stock per year.
The Planning Officers Society warned that growth is not always in the hands of local authorities but the Home Builders Federation said they must be proactive.
Housing and Delivery Grant Allocation Mechanism is available at PlanningResource.co.uk/doc.