A number of residents gathered on Smith Street in protest against "intensive urban development".

In gathering, the residents called on the planning and acting water minister, Minister Richard Wynne, to halt urban developments "on important catchment and groundwater recharge areas in the Hepburn Mineral Springs catchment" until a scientific investigation is undertaken.

Resident Loris Duclos said three proposed developments - two in Smith Street and one in Jamieson Street - represented the majority of new house builds in the town in the near future and were all located on recharge areas for the catchment.

"These larger blocks were set aside by our forefathers in the 1800s for low-density use because the importance of recharge areas was understood. I don't know why our current planners are ignoring this wisdom," Ms Duclos said.

She outlined concerns that Hepburn Shire Council's processes failed to properly consider the impact that large scale developments could have on Hepburn Mineral Springs and the underlying freshwater aquifers that were "an integral part of drought-proofing Daylesford's town water supply".

Ms Duclos believed the area was supposed to be protected by an Environmental Significance Overlay (ESO2), which includes protecting the springs, their aquifers and environs from impacts of effluent drainage, as well as to protect bores that supply water to the town.

This overlay, she said, meant planning applications needed to consider comments from the Victorian Mineral Water Committee. With the committee no longer in existence, Ms Duclos raised concerns about how the mineral springs recharge areas were being managed.

"The Minister is being asked by the residents of Daylesford and Hepburn Springs to urgently call for a full scientific investigation into the negative hydrological impacts in Hepburn Mineral Springs catchment. The lack of proper oversight of this most unique and precious water resource is clearly unsustainable," Ms Duclos said.

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"The town's booming tourist economy is largely based around the renowned mineral springs at Hepburn. We can't have any more development that impacts on our springs and on town water supply areas."

The developments in question have been contentious among the community, particularly the 42-lot proposed subdivision of a former hobby farm at 17 Smith Street.

A group of community members have objected to the development since it was first advertised in late 2019, citing concerns about how the development would change the character of the town.

Daylesford resident Gina Lyons said such a large housing estate at the entrance to the town for those coming from Melbourne or Bendigo would detract from its beauty.

Ms Lyons is concerned that if the development is approved then it will be "only the beginning" and could set a precedent for ongoing intensive development.

"The town noted for its extraordinary natural beauty and its country town feel - gone. Forever."

Other concerns raised have been about the removal of trees, traffic congestion and safety concerns with the development being next door to St Michael's Primary School and up the road from the only secondary school in the region, Daylesford College.

The project was recently 'called in' from VCAT by the minister and it is understood a decision is to be made as early as this week.

A spokesperson for the council said they understood community interest in the matter.

"Whilst Council acknowledges the history of this site and region, the land has been determined appropriate for residential growth and has been allocated the General Residential Zone and therefore, intensification from its original lot size subject to assessment under and deemed compliance with the Hepburn Planning Scheme and relevant legislation," the spokesperson said.

They added that should the development be approved then it would be required to connect to reticulated sewer and water.

"All stormwater management will be subject to detailed engineered design to ensure risk of stormwater runoff is managed."

In January, the developer of 17 Smith Street, Joseph van Dyk, said he was eagerly anticipating an outcome about the project.

"We look forward to proceeding with the development in some form or another in the near future and contributing to the economic recovery of Daylesford and the greater Hepburn region."

In response to questions, a government spokesperson said Goulburn Murray Water managed the groundwater resources in Daylesford and Hepburn according to the Central Victorian Mineral Springs Groundwater Local Management Area, as well as surface water in the area.

The government said the planning permit application for 17 Smith Street was referred to GMW.

"Goulburn Murray Water didn't raise concerns in regards to this development as they determined that groundwater recharge would not be impacted."

The site is located in the General Residential Zone and is affected by the Environmental Significance Overlay (Schedules 1 and 2). The Environmental Significance Overlays relate to water quality, protection of groundwater and mineral springs, they said.

The proposed subdivision has been designed to follow the contours of the land to avoid potential impacts on waterway health from soil disturbance.

The matter is currently before the Priority Projects Standing Advisory Committee for independent review, "as well as for advice and recommendations on the proposal".

The committee is expected to hand down its report soon and the government will consider its findings before making a recommendation to the Governor in Council.