Funding to address overcrowding in remote Indigenous communities should take precedence over Nigel Scullion’s push to introduce home ownership targets to Closing the Gap goals, the Western Australian and South Australian governments have said.

Scullion, the federal Indigenous affairs minister, is under fire from the Labor state governments who say the federal government does not plan to extend the 10-year $5.4bn National Partnership Agreement on Remote Housing (NPARH), which expires in June 2018.

The withdrawal of federal funding for housing in remote areas of WA will be damaging and disruptive WA housing minister

The federal government has not announced that it is discontinuing the agreement but the states say it has not begun negotiations to renew it.

At the same time, Scullion is reportedly considering whether home ownership should be included as a target in the new Closing the Gap goals, which will take effect from June. Consultation is being undertaken with the Aboriginal and Torres Strait Islander community to frame the goals.

Scullion said the claims by SA and WA are “a fiction” that will undermine good faith negotiations on the continuation of the deal, which he said began on Wednesday – the day the WA housing minister, Peter Tinley, issued a press release citing his concerns.

Guardian Australia understands WA is concerned the federal government will not commit to another long-term funding deal but will instead make a one-off commitment.

Tinley said that discontinuing the remote community housing agreement would be “damaging and disruptive” for remote Aboriginal communities in WA, and accused the federal government of “appalling and irresponsible” hypocrisy for doing so while undertaking the Closing the Gap refresh.

“The Western Australian government strongly believes the withdrawal of federal funding for housing in remote areas of WA will be damaging and disruptive for those communities, and will negatively impact progress towards Closing the Gap,” he told Guardian Australia.

The Greens senator for WA, Rachel Siewert, said that while home ownership was a worthy aspiration if it was being called for by Indigenous people themselves, the chronic rates of overcrowding in remote Indigenous communities were a more urgent health priority.

“I’m not saying that in remote communities people don’t want to own their homes, but we are putting more western traditional expectations on Aboriginal communities and Aboriginal people and, when you are talking about remote communities, it’s a very different world,” she told Guardian Australia.

“People move between communities. They move between houses in communities. I think people are more interested in accommodation per se, accessing generally safe and secure housing, rather than owning it.”

Siewert said the NPARH had been “a wasted opportunity,” arguing that funding had not been distributed strategically, and state governments could not be expected to carry alone the high cost of building and maintaining houses in remote communities.

WA received about $110m a year under the NPARH, while SA received about $15m.

The SA social housing minister, Zoe Bettison, said that home ownership was not a viable solution to the overcrowding issue in many SA remote communities because the houses were built on leased land and did not have a title.

“Additionally, low levels of employment and high construction costs make home ownership a burden on low-income people living in remote communities,” Bettison said. “The remote housing program is an important way governments help to close health and education gaps by providing safe and affordable housing, which in turn reduces overcrowding.”

Tinley warned that WA would not be able to cover the loss if the federal funding was discontinued.

Federal funding for municipal and essential services in remote Indigenous communities was cut in 2014, prompting the former WA government to propose closing up to 150 remote communities on the grounds that they were “unsustainable”.

The McGowan government has vowed not to close any communities, but is continuing the Barnett government’s remote community service reform project which will assess communities and focus essential and municipal services funding on the most viable. Tinley said that process would be unchanged by a possible withdrawal of remote community housing funding.

However, he said the McGowan government had inherited a huge deficit and “there is no way we can afford to pick up a funding shortfall from the commonwealth that will equate to hundreds of millions of dollars over the coming years.”

SA, WA, Queensland and the Northern Territory are partners to the agreement, which is worth $776m annually.

The Northern Territory government has committed $1.1bn to remote housing over the next 10 years, and asked the federal government to match it.

“We are being abandoned by this Turnbull government,” said Bettison.

“There was nothing in the forward estimates and what I was concerned about has come to be true – they’re only going to support the Northern Territory going forward.”

The states appear to be basing their assertion that federal support will be cut on the lack of funding earmarked in the midyear economic and fiscal outlook, released this week, which earmarked separate housing funds for the Northern Territory.

The NT government has previously indicated it needed about $500m more than its $1.1bn injection to fully fund the housing need.

Scullion’s office dismissed the public complaints by the WA and SA ministers as “nonsense” because negotiations were still ongoing and no funding decisions had been made.

“As Peter Tinley and Zoe Bettison know full well, commonwealth officials are in discussion with their state counterparts regarding future funding arrangements,” a spokesman for Scullion responded.

“This will include further commonwealth funding.”

“This is a fiction created by certain Labor state ministers who are clearly trying to abrogate their own responsibility to their Indigenous housing tenants and it should be called out for what this is,” the spokesman said.

“The National Partnership on Remote Housing was always scheduled to cease on 30 June 2018. Under the NPARH the commonwealth paid the states $5.4bn to reduce overcrowding yet they abjectly failed to achieve this – this is why we are once again in negotiation with the states.”

In October the Australian reported the partner jurisdictions were spending up to 34% of funding on “ancillary costs”.