The NSW government had proposed to buy Sydney's Rosehill Racecourse in a potential $5 billion deal and turn the 140-year-old track into a "mini-city" of about 25,000 homes.
But despite being backed by executives of the Australian Turf Club, which owns the site, the club's members voted down the pitch on Tuesday evening.
Turf club chairman Peter McGauran announced 56 per cent of members voted against the sale.
Premier Chris Minns lamented a "golden opportunity that slipped through our fingers" but said housing reform must continue to be bold despite the rejection.
"I don't take from this result that we should shut up shop and stop with major initiatives for housing proposals in the state, we should go the other way," he said.
"We should be taking more risks when it comes to major housing proposals in the second most expensive city on Earth, we've been far too timid for far too long, and it's resulted in young people fleeing Sydney at an alarming rate."
The proposal was unveiled with much fanfare in 2023 as a major plank in the government's solution to the ongoing housing crisis.
The redevelopment involved turning Rosehill, one of the last major greenfield sites in Sydney, into up to 25,000 homes complete with an underground metro station.
Training facilities would have been shifted west while ageing suburban racetracks Canterbury and Warwick Farm would have received major renovations to bring them into the 21st century.
The proceeds - potentially worth up to $5 billion - would have been funnelled into other racing, training and stabling venues.
But high-profile trainers Gai Waterhouse and Chris Waller became faces of a sustained campaign to save the racecourse.
The rejection prompted a quick jab from the state opposition, which said the result of the vote continued the government's poor record on housing reform.
"The government had a plan finished for (Rosehill) that they iced for 18 months while they chased this mirage," opposition housing spokesman Scott Farlow said.
Advocacy group the Western Sydney Leadership Dialogue said the members had delivered a blow to the area.
"This is a lamentable outcome … (turf club members) were sadly swayed by a cynical and selfish campaign from wealthy horse breeders, who looked a gift horse in the mouth and said no," the group's chairman Christopher Brown said.
"Their short-sighted decision means the loss of 25,000 potential homes for a booming part of western Sydney and the loss of funds to futureproof the racing industry for generations to come."
Mr McGauran said the hours-long debate at the meeting was civil and constructive.
"In the end, it was a big change, it wasn't incremental or modest reform, and that's always a challenge, but members of the ATC approached it diligently and conscientiously, and as a result, we have a club that can pull together now and move on," he said.
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