Treasurer Jim Chalmers and Housing Minister Clare O’Neil insist Labor’s contentious property tax changes aren’t designed to cause house prices to drop, after a Liberal senator suggested a downturn was needed for young people to ever afford a home.

The median capital city house price is still north of $1 million, despite values last month falling in Sydney and Melbourne, following Reserve Bank interest rate rises in February, March and May.

Values are still soaring by double-digit annual figures in Brisbane, Perth and Adelaide which now have middle house prices in the seven-figure range, putting homes with a backyard further beyond the reach of average-income earners.

With Australia a two-speed housing market, economists are now expecting average capital city price growth to flatline or fall as a result of the Federal Government’s plan to restrict negative gearing to brand new homes from July 2027, and replace the 50 per cent capital gains tax discount with a minimum 30 per cent tax on inflation-adjusted gains.

“We now expect dwelling prices to eventually settle just under five per cent below where they otherwise would have been in response to the changes to negative gearing and CGT for housing,” Commonwealth Bank senior economist Trent Saunders said.

Dr Chalmers argued Labor’s tax changes weren’t designed to make house prices fall, with increases still outpacing wages growth outside of Sydney and Melbourne.

“We’re not targeting a particular price outcome in percentage terms or in dollar terms,” he told reporters in Canberra on Wednesday.

“The Treasury analysis that we released with the Budget assumes that house prices continue to grow but a bit more slowly.”

Dr Chalmers argued existing tax policies gave investors an advantage over first-homebuyers.

“We all know about first home buyers showing up to auctions and competing against subsidised investors who might already have five or 10 or 15 properties, and so that’s the challenge that we are addressing with our tax reform package,” he said.

Ms O’Neil told Sunrise host Natalie Barr that falling prices were “not what the Government wants” when asked how much it wanted them to drop by.

“Well, Nat, what we want to see is a sustainable growth,” the minister said.

After the exchange, Liberal senator and Opposition housing frontbencher Andrew Bragg suggested house prices needed to fall, using the phrase “the truth that everyone knows”.

“Australians are looking for authentic leadership. They’re over the bullshit,” he said.

Despite prices being unaffordable, first-homebuyers are still saving up for mortgage deposits.

New Treasury data has revealed that almost 60 per cent of first-home buyers who used the 5 per cent deposit scheme had a larger deposit – but below the 20 per cent needed to avoid paying costly lenders’ mortgage insurance.

Of the 260,000 people who have used the scheme since it it debuted in October, 65,000 had transitioned off it because they either got more than 20 per cent equity in their home or had sold the property.

Just 13 people have defaulted and needed taxpayers to pay out the loan.

Almost 70 per cent of participants were ahead on their mortgage repayments.

But the Treasury Budget papers admitted the Federal Government’s housing tax plans would in fact result in 35,000 fewer homes over the coming decade.

“Lower house price growth will have a modest impact on housing supply, with the increase in supply over the next decade expected to be only around 35,000 dwellings fewer compared to no tax policy change, equivalent to around a quarter of a per cent of the current dwelling stock,” it said.

The Government is also arguing that its tax changes would help an additional 75,000 first home buyers over the next decade.

Senator Bragg has flagged that Treasury secretary Jenny Wilkinson and Reserve Bank of Australia governor Michele Bullock would be asked by Coalition senators about Treasury housing supply predictions when they fronted an economics committee hearing on Thursday.

“There are key questions that Labor must answer this week,” he said.

“How much will investment in housing go down; why is the government trying to reduce investment in housing?”

Senator Bragg cited separate modelling by Qaive and Tulipwood Economics for Master Builders Australia, the Housing Industry Association and the Property Council of Australia that predicted Labor’s negative gearing changes would mean 22,700 fewer new homes over five years.