Promising to invest 3.2 billion kronor a year in the project, Sweden's Social Democrat leader said that the plan would also improve employment opportunities.
"We have a have a great housing shortage in Sweden. Housing is a key part of the government's labour strategy," he told a press conference.
"A housing shortage is one of the biggest obstacles to growth, such that people cannot move wherever they want," he added.
Flanked by the country's Social Democrat Finance Minister Magdalena Andersson and the leaders of Sweden's Green Party, his junior coalition partner, he said that he planned to focus on building student accommodation and small apartments.
Around a third of Swedes live in rental accommodation and the country's housing shortage was a key campaign issue at the last general election.
Close to 300,000 young adults between 20 and 27 years of age neither own their own property nor have a long term rental contract.
While in many other European countries public housing is reserved for those on lower incomes, anyone in Sweden can apply for it and it is usually maintained to a high standard. Both public and privately owned apartments are available to those who register with the city's housing service.
The current accommodation shortage is particularly acute in the capital Stockholm, where in some parts of the city there is a 20-year wait for apartment-seekers. This has resulted in a strong subletting culture, with prices spiralling in recent years despite rules designed to cap rental increases.
A small studio flat in central Stockholm should cost around 4,000 kronor ($471) a month, but tenants with second hand contacts can typically be expected to pay around 10,000 kronor ($1179).
Meanwhile, property prices are shooting up in Sweden's major cities, leading to complaints that young buyers are also being frozen out of the market.
"The demand for small apartments in particular is great. The housing shortage creates long queues for rented apartments and expensive apartments for buying. This makes it harder for young people and students above all to get their feet on the housing ladder, particularly as many in that group don't have a permanent job," wrote Sweden's Minister for Housing, Urban Development and Information Technology in a debate article published by The Local on Tuesday.
His comments were echoed by Stefan Löfven at Wednesday's press conference.
"The housing shortage creates social problems. Many young people remain at home for a longer time than they and their parents had thought. People are finding it harder to live their lives. This is a freedom issue," the Prime Minister said.
The Social Democrat leader also acknowleged that the crisis was "reducing opportunities for growth", by making it difficult for companies to recruit from other parts of the country or from abroad.
Ministers said that new apartments of around 30 square metres would cost no more than 3,600 kronor a month and that the housing programme would be financed by cutting tax breaks for domestic building work, including home improvements.
"We're moving resources from renovations to new-builds," Finance Minister Magdalena Andersson told the conference.
"Subsidies will be available immediately to private and public sector property owners, to finance the building of rental apartments. The apartments will be subject to strict energy efficiency standards," she added.
While all of Sweden's mainstream political groups have previously suggested that building new homes should be a priority, politicians from the country's centre-right Alliance parties were quick to question the centre-left coalition's approach following the press conference.
Centre party leader Annie Lööf released a statement saying she feared the changes could lead to a growing black labour market, as homeowners sought to avoid paying higher taxes.
Swedish newspaper Svenska Dagbladet estimated that reconstruction work currently costing homeowners around 10,000 kronor would be 2,000 kronor more expensive following the tax break shift.
Sweden's Prime Minister previously suggested he would not scrap the so-called ROT tax break for Swedes seeking to renovate their properties.
"It is a betrayal and a huge breach of faith. Stefan Löfven clearly said before the election that the ROT deduction would be unchanged," Niklas Wykman, a tax policy spokesperson for the Moderate party told the TT news agency, adding that the change was unfair on property owners who had budgeted to make changes under the current terms and conditions.