KEVIN RUDD yesterday defended the Federal Government's increases to the first home owners grant against criticisms that they would raise house prices.

The Prime Minister said the decision to boost the first home owners grant from $7000 to $14,000 for people buying established homes and to $21,000 for newly-built homes would stimulate housing construction.

"And it is balanced by the various supply side measures already under way in the Government's $2.2 billion housing affordability program," he said.

The Government announced the higher grants as part of its $10.4 billion stimulus package.

Some private sector economists have argued that the extra grants could feed into higher house prices. The Howard government provided a similar boost to first home owners grants between 2000 and 2002 which was blamed for giving a "second wind" to the house price boom which started in the mid-1990s.

Senior government officials argue that current circumstances are different because economic growth is slowing and house prices have been flat since the start of the year. They say the additional grants are more likely to provide a cushion against falls in house prices than increase them.

Macquarie Bank's interest rates strategist, Rory Robertson, said falling house prices were a major problem in the United States, Britain and other parts of Europe.

"The damage done by falling home prices to bank balance sheets in these economies and growing damage to consumer spending obviously needs to be avoided in Australia," he said.