A change to the definition of homelessness would be "very valuable", Lord Freud, the welfare minister, said yesterday, becoming the first coalition minister to argue for a change that many believe is necessary if the government is to liberalise the social housing market.

Speaking to the work and pensions select committee, Freud signalled a possible revision of the statutory definition of homelessness – last set out in 1986 – so that it need not include overcrowding, or the risk of homelessness.

Freud said it could be "quite valuable" to revise the current criteria in place, arguing: "We have found it very difficult to define homelessness in this country. The estimates [of homelessness] go from a few thousand to hundreds of thousands depending on who you are talking to."

He added that the definition of homelessness had bedevilled the current debate on the numbers likely to be made homeless by government plans to cap benefit. The differing definitions were, he said, leading to some extravagant claims: "At a pinch a council could say anyone who has to look at their financing, and cut their cloth to what they can afford has a risk of homelessness.

"Clearly the common view of homelessness is nothing over one's head at all. The statutory definitions are different to that, and they are adequate housing."

Most government statistics on homelessness relate to the statutorily homeless, namely those households which meet specific criteria of priority need set out in 1986 legislation, and to whom a homelessness duty has been accepted by a local authority.

The definition of homelessness is very broad and may include someone living in bad conditions that fall below standard, or that they cannot afford.

Freud did not expand on his thinking but some housing experts have predicted the government may need to change the definition of homelessness to prevent local councils having to take responsibility for housing benefit recipients unable to pay private sector rents as their housing benefit is cut.

He said the number of people living in overcrowded accommodation was around 250,000 in the socially rented sector, and 160,000 in the private rented sector. Depending on how you wanted to define it, they could be considered homeless.

Freud added: "It is immensely unhelpful when people and commentators stir up fears using somewhat arbitrary figures because it frightens people."

The housing charity Shelter has claimed that as many as 80,000 people will be made homeless by plans to cap state support for the poor living in the private rented sector.

Freud insisted plans to cut state support for the rents of the poor and unemployed in the private rented sector will not lead either to significant increases in homelessness, or to a rise in use of temporary accommodation.

As part of a range of measures to curb the housing benefit bill, the government is placing a cap of £250 a week for a one-bed property in the private rented sector and £400 for a family home. Many local councils have warned that it will force as many as 82,000 people out of central London, and other areas of high housing demand.

Freud said those claiming the reforms will lead to mass homelessness were scaremongering: "We are expecting a large number of people who receive less housing benefit to be able to negotiate their rents downwards, and the landlords will move to the new lower rate. We don't think some of these dramatic figures bear any relationship to what is likely to transpire".

He argued rents in the private rented sector had been soaring because landlords knew a tenant's rent would be funded by the state through a local housing allowance, the equivalent of housing benefit in the private rented sector. Landlords were charging rents at the maximum of the threshold. He said the government was the dominant buyer in the private rented sector, providing benefit to 40% of the private rental market sector of 3.6m.

He said rents in the private rented market overall had risen by 15% between 2000-2007 in real terms, but by 25% in private rented homes funded though housing benefit. Freud complained the government had not been very smart buyers in the private rented sector: "When you publish what rate you are prepared are pay, it is not surprising that landlords gravitate to that level."

There had been a clear bunching of rent levels by private landlords around the figures set by the government.

He also rejected suggestions of a new exodus of the poor from the centre of cities to the suburbs of the kind seen in Paris, pointing out 70% of tenants in the private rental sector had anyway only been in their accommodation for three years or less. He also insisted it was fair to ask low-income families to move out of homes the working poor could not afford.

The average commuter in London travels 15 miles a day, and there was a strong likelihood that those shifted to outer London would readily find work.

He said those tenants that need to move to cheaper accommodation in the suburbs will not put undue pressure on school places, pointing out that there are 50,500 surplus places in London in primary schools and 31,000 in secondary schools.

Freud also disclosed the decision to link housing benefit to the Consumer Price Index and no longer to the Retail Price Index was for two years only from 2013, and no longer term decision had been made. The shift will lead to lower increases in housing benefit.