Means testing is a disincentive for people bettering themselves. If moving off the benefit, or taking a new job is going to mean you have to move from cheap, secure accomodation to the expensive, insecure private sector, it is a very compelling reason not to do it.
It also changes the role of state housing. Social housing was intended to accomodate people from all social backgrounds - hence, the idea of a means test was anathema to the philosophy underpinning it. Obviously, people with wealth didn't need it - but if they had become weathly since being allocated a state owned house, they weren't forced out.
Saying that state housing should be provided based upon need sounds good, but it misses the real cause of the problem - lack of supply. If there is a such a desperate shortage of state housing that people need to be moved out of them to make way for those with greater need, then the more sensible solution would be to build more.
Interestingly, this might also have the effect of lessening the upward pressure on private sector prices, meaning that more people would be able to move out of the public sector - if they wanted to.
1 - "'State house for life' axed in review plan," by Derek Cheng. Published in the New Zealand herald, 25th of October, 2010.