Treasurer Josh Frydenberg says Labor's housing policy will spark $12 billion downturn

The Morrison government has seized on a review of Labor's housing policy that claims the Opposition's proposed changes to negative gearing and limiting the capital gains tax will spark a $12 billion downturn in construction.

Treasurer Josh Frydenberg said the modelling, by Master Builders Australia, shows 1.3 million Australians who negative gear investment properties - and all with equity in their homes - will be punished.

But Labor says the review can't be taken seriously because it didn't factor in the "grandfathering" of existing investments.

"It's a fatal flaw in the modelling," shadow treasurer Chris Bowen said.

"You can't claim you've modelled Labor's policy when your own document says you haven't."

Labor's policy would limit negative gearing to new homes and cut the capital gains tax discount from 50 to 25 per cent.

The review claims the changes would cut the construction of 42,000 new dwellings over five years.

Mr Frydenberg said it's the worst possible time as Australia's housing markets cools.

But Mr Bowen said "it's the right policy" and many economists had backed it in.