Prime Minister Scott Morrison believes the extension of the HomeBuilder scheme until March will mean a steady pipeline of construction activity and maintain the momentum in Australia's economic recovery.
The government's HomeBuilder grants program, which assists home builders and renovators, is being extended for three months, which is expected to see a further 15,000 homes approved under the scheme.
This is in addition to the 27,000 homes the scheme is already expected to support.
"HomeBuilder is a key part of my government's economic recovery plan for Australia," Mr Morrison said in a statement on Sunday.
"We're keeping people in jobs and putting Australians' dream homes within reach."
Treasurer Josh Frydenberg said the HomeBuilder program had delivered the stimulus the housing sector needed.
Housing Minister Michael Sukkar confirmed the value of the grant would decrease from $25,000 to $15,000 after consultation with the construction sector.
However, the price cap for new buildings in NSW has been increased from $750,000 to $950,000 and in Victoria from $750,000 to $850,000.
Labor housing spokesman Jason Clare said the changes would help but they were not enough to stop the housing construction industry shrinking.
He said 170,000 homes were built across Australia last financial year, while this financial year the Housing Industry Association predicts as few as 150,000 homes will be built.
Treasury forecasts only 140,000 homes will be built.
"These changes to the HomeBuilder Scheme are too small to bridge the difference," Mr Clare said in a statement.
"More needs to be done to save tradies' jobs."
However, building groups welcomed the decision, calling it a "giant leap" towards economic recovery.
"It will generate billions in economic activity, help save thousands of builder and tradie businesses from going under and protect thousands more jobs in the building supply chain," Master Builders Australia chief executive Denita Wawn said.
Housing Industry Association managing director Graham Wolfe said the extension would bring certainty and stability that would ensure demand was carried forward to 2021.
Property Council chief executive Ken Morrison said HomeBuilder had been the most successful federal stimulus for the construction industry in the past two decades.
Australian Associated Press