The investment, jointly funded by the federal and West Australian governments, is part of $4.7 billion set aside for housing and homelessness in the state budget to be handed down this week.
The joint spend is expected to deliver more than 34,000 new homes, including 11,000 exclusively for first home buyers, over the next eight years.
WA Treasurer Rita Saffioti promised increasing housing supply would be the budget's number-one priority.
"We're proud to have secured this landmark funding agreement with the Albanese Labor government, which will deliver thousands of new homes for Western Australians and put home ownership within reach for many," she said.
The federal government will contribute more than $1 billion under the agreement to build the homes.
"Young Western Australians are not getting the housing opportunities they deserve and our governments are stepping up," federal Housing Minister Clare O'Neil said.
"We're rolling up our sleeves and building homes ourselves."
Houses will be built in priority growth areas in and around Metronet station precincts, in corridors including North Ellenbrook and East Wanneroo, and regional locations such as Albany, Eaton, Australind and East Boyanup.
First home buyers will be supported through a shared equity program, in which the state government takes 35 per cent equity, reducing the cost of buying a home by up to $250,000.
"By delivering a critical new supply of homes for first home buyers, my government is working with the commonwealth to ease pressure throughout the state's housing market, ensuring every Western Australian has the security a home provides," Premier Roger Cook said.
"(The funding) will also support housing development in regional WA, where my government has recently announced it will build hundreds of homes for regional frontline workers as part of our Seven Cities vision."
WA Opposition Leader Basil Zempilas accused the government of being in denial about the housing crisis and slammed the announcement as evidence of "playing catch-up".
"If you fail to plan, you are planning to fail, and that's what this state government has done," he told reporters.
"These are the sorts of sums of money that should have been allocated throughout their tenure, not all in one hit as this state government plays catch-up."
The announcement was widely welcomed by the construction industry, with Master Builders Australia saying builders were looking for this kind of action across all levels of government.
"Supply-side measures are what are needed to grow available stock, not simply shifting demand around (and) if we are to fight inflation and further interest rate hikes, increased construction and housing supply is a vital part of the mix," Master Builders Australia chief executive Denita Wawn said.
The announcement showed the government was pulling the right levers in the housing sector, Urban Development Institute of Australia national president Oscar Stanley said.
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