Official documents released under freedom of information show the advice given to government on the opposition's policy contradicts the Treasurer's previous claims it would "smash" the housing market.
In the lead up to the 2016 federal election, Labor drew a line in the sand on negative gearing.
It pledged to wind back the popular tax deduction, which allows property investors to claim losses and reduce their overall tax bill.
At the time, Treasurer Scott Morrison warned Labor's move would harm the economy, crash confidence and smash the housing market.
But official documents from his own department show the advice given to the government was that such changes would only have a relatively modest downward impact on house prices.
Shadow Treasurer Chris Bowen has criticised what he's calling a government scare campaign on Labor's policy.
Education Minister Simon Birmingham maintains changing negative gearing arrangements won't fix the housing affordability crisis on Australia's east coast.
He says the government's policy to allow first-home buyers to use some of their superannuation to save for a deposit is still the best way forward.
Labor plans to keep its policy to take to the next federal election.
It includes restricting negative gearing to new homes only, and halving the capital gains tax discount from 50 per cent to 25.
Budget Policy Program Director from the Grattan Institute, Danielle Wood, estimates that over a decade the measures would result in a two per cent reduction in house prices.
"It will have some impact on housing affordability. Downward pressure on prices means more affordable housing ultimately but the bigger effect of the policy is going to be changing who's buying houses, so it's going to make housing less attractive for investors, particularly negatively-geared investors, and therefore we're likely to see more home buyers getting into the market, people buying the house to actually live in and that includes first-home buyers," Mr Wood said.
