Planning applications downstream of Northern Ireland's two biggest reservoirs are being held up.
It follows a routine inspection in 2018 which identified remedial work needed at the Silent Valley and Ben Crom reservoirs.
Between them they hold almost five billion gallons of water and supply up to a quarter of NI with drinking water.
NI Water said it had "no concerns" about the "structural integrity" of the two reservoirs.
They sit, one above the other, in the heart of the Mourne Mountains.
But it has emerged that applications for development below the dams are not being approved at present.
In June 2019, the Rivers Agency told Newry, Mourne and Down Council planners that it had not been updated on the condition of the reservoirs following the inspection.
As such, it said, Silent Valley and Ben Crom did not meet the conditions for development next to reservoirs.
DUP councillor Glynn Hanna said the issue was having an impact on people wanting to build homes and businesses in the area.
He claimed it could be "months if not years" before the backlog of applications could be addressed.
"NI Water needs to give an indication of when the problem at the Silent Valley dams will be resolved as soon as possible," he said.
Jill McCauley, an Ulster Unionist Party councillor, said places were being "badly affected with this deadlock".
She added that a large housing development that was "in the pipeline" had come to "a standstill".
Michael Savage of the SDLP called on NI Water to "come clean".
"There are a lot of applications in the pipeline, families are waiting for houses, businesses are waiting for development, and this isn't good enough," he said.
Alliance's Patrick Brown said: "There's literally millions of pounds waiting to be spent in the Kilkeel area and it's being held back."
"It's holding back an area that frankly needs an economic boost," he added.
The BBC has approached Sinn Féin and Aontú for comment.
Flood maps show the potential inundation area from any breach of the reservoirs.
It runs for several miles along the course of the Kilkeel River from the mountains to the sea and covers a significant part of Kilkeel town and harbour.
It is believed the planning restriction could affect proposed development in this inundation area.
A spokesperson for NI Water said people living and working in the area should "feel reassured that the reservoirs continue to be operated and maintained to a safe standard".
They said the issue had arisen as a result of how the rules were now being applied, rather than from a change in their inspections and maintenance and the required work would be done.
"NI Water will proceed with the identified work, ensuring it is completed as per the recommendations of the Independent Reservoir Panel Engineer.
"This will ensure the maintenance of the reservoirs continues in line with good industry practice," the spokesperson said.
In August, 1,500 residents in the Derbyshire town of Whaley Bridge had to be evacuated after the dam wall of a nearby reservoir was damaged by heavy rain.
Engineers have said repair work there could take up to three years.