Budget won't be 'main driver' if house prices fall, housing minister says

Clare O'Neil says the government's tax changes won't cause a sharp fall in house prices. (ABC News: Callum Flinn)

Clare O'Neil says suggestions the government's proposed tax changes could knock 10 per cent off the price of homes are overblown, and Treasury expects only a "mild" impact on price growth.

The housing minister says if prices did fall sharply, it would not be due to the proposed changes to negative gearing and capital gains tax.

The government is consulting on its proposed tax changes, with a broadening of small business exclusions one option on the table.

Housing Minister Clare O'Neil says if predictions come true that house prices could drop by 10 per cent, it won't be the fault of the government's federal budget.

Analysts at Morgan Stanley expect the government's proposed changes to negative gearing and capital gains tax could reverse home prices due to lower expected returns and constrained borrowing capacity for investors.

Westpac meanwhile has forecast the budget will "significantly affect" the housing market, with a third of new investor activity expected to fall off and total housing turnover expected to drop by a fifth.

The bank's "IQ" team expected dwelling prices to stall this year, with a risk in the near-term of an "air pocket" where prices drop sharply due to uncertainty over the tax changes and higher interest rates.

Auctions have slowed as home buyers take stock of the government's proposal to end negative gearing for existing homes bought after budget night and replace the 50 per cent tax discount on capital gains tax with a smaller discount that would only compensate for inflation.

Ms O'Neil said those tax changes would only have a small impact on house prices.

"I think there's a bunch of economic models out there in the news … what I can tell you is the tax changes we are making in the budget are not the main driver of that," Ms O'Neil said.

"House prices in our country move. The biggest driver of them is what goes on with interest rates.

"Treasury has modelled the impact of our tax changes on house prices, there is a mild affordability impact. For that, we get 75,000 rental households into their own home and a fairer market for housing in this country forever."

Treasury forecast in the budget that house price growth would slow by about 2 per cent in the short term.

The Grattan Institute and Commonwealth Bank have supported that forecast.

It also forecast only a minor change to rents, and Ms O'Neil told Insiders the government's efforts to "build, build, build" would place downward pressure on the cost of rent