Portsmouth City Council's planning committee agreed the deferral on Wednesday, despite several of its members, including chairman Lee Hunt, favouring refusal of the £55m scheme.
'A deferment gives the applicant a chance to address the issues we have,' councillor Linda Symes said. 'We've all agreed they want to do a good job on the site. To just refuse it seems a bit harsh when there could be further negotiations that could end up with what we wanted.'
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Developer PJ Livesey said its proposals for more than 200 homes were the 'best option' for the Milton site.
'The city council has allocated this site in its local plan for a range of uses, including residential,' its planning manager Richard Wilshaw said. 'In addition to the 58 new, high-quality and sustainable homes proposed within the grounds, the conversion of listed buildings would create 151 unique properties.
'It would take roughly 35 acres to build this many new homes elsewhere in the city - a very difficult task on an island like Portsmouth.'
Howard Williams, representing NHS Property Services which owns the hospital site, said maintenance of the site cost £1.6m last year and that it was 'an unnecessary financial drain'.
'To put that figure into context, that would fund 64 qualified nurses, 188 hip replacements and 40 heart transplants,' he said. 'We need to be released from this liability and be able to pass the ownership of this building across to the developer.'
A report by council planning officers had also recommended planning permission be granted. It said the proposal was 'sustainable development' that would 'contribute positively' to the city while safeguarding the future of the listed buildings.
However, the scheme has attracted significant opposition from people living in the area.
Rod Bailey, the chairman of Milton Neighbourhood Planning Forum, welcomed proposals to redevelop, rather than demolish, the hospital but said the scheme would have a negative effect on the area.
'I think it’s great that there's an economic reuse of the hospital,' he said. 'Nobody wants to see a building of architectural merit just fall into decay but I can't see that this is properly sustainable development.
'There are social consequences in not providing affordable housing. For us residents who live around here, there's also the issue with traffic and air pollution.'
He was backed a Wednesday's meeting by Janice Burkinshaw, the chair of Milton Neighbourhood Forum, who said traffic congestion would be exacerbated by the development and Keep Milton Green Campaigner Martin Lock who opposed plans to fell 57 trees.
Former city councillor Steve Pitt, the chairman of St James' Memorial Park Trust, said increasing house prices meant the viability assessment used to justify the exclusion of any affordable housing in the development was out-of-date.
'We clearly are in excess of the uplift allowed for developments,' he said. 'What we are seeing is demand for housing in this city. People want to come and live here prices values are going up, increasing the value of this development compared to last year.'
Ward councillors, including the leader of the city council Gerald Vernon-Jackson and several cabinet members also spoke out against the application.
Cllr Vernon-Jackson said changes made since the plans were submitted had made the proposals 'better' but that issues with the lack of affordable housing, the felling of protected trees, the use of the hospital chapel and traffic mitigation measures had not been resolved.
'I still have significant concerns,' he said. 'But if there was more progress made, maybe I'd have been tipped over the edge to support it.'
Cabinet member for housing, councillor Darren Sanders, said traffic data collected in June 2019 was too old to be used to determine planning applications and echoed points raised by Mr Pitt.
But Mr Wilshaw said the rising cost of building supplies was outstripping increases in house prices and that the development was 'less viable than it was 12 months ago' when the viability assessment was made.
He added that mitigation measures would result in increases in both the number of trees and the amount of public open space on the site.
Despite these assurances, Cllr Hunt said he remained opposed to the application and would support refusing planning permission.
'I'm still not convinced,' he said. 'This application is nearly there but we've got to get the affordable housing in.'
Together with two other councillors, he voted against deferring the application but they were outvoted with five committee members supporting the delay.
Speaking after the meeting, PJ Livesey managing director Georgina Lynch said the deferral was 'frustrating' but said the firm 'welcomed the opportunity for further discussions' and would continue to progress the scheme.
'We believe our plans offer the best way forward for the St James' site both to save the listed buildings and provide much needed high-quality housing for Portsmouth,' she said.