More than 100 hectares of prime Melbourne land that Treasurer Scott Morrison touted in the federal budget as an affordable housing solution will not be released for sale for years.

And a Senate budget hearing this week investigating the sale of defence land on the Maribyrnong River has revealed the government could sell much of the highly toxic property without decontaminating it first.

For more than a decade, the Defence Department had worked with the Victorian government on plans to develop 3000 homes on the Maribyrnong Defence Site, 127 hectares of land in a stunning location on the Maribyrnong River.

But on Monday night, the deputy secretary of Defence's property division said the federal government had recently rejected the Andrews government's "last and final offer" to buy the land. The offer was made by state agency Development Victoria late last year.

"The deal that was on offer did not represent best value for money," said Defence's Steven Grzeskowiak. "We might be able to get better value for the Australian taxpayer out of the development."

Development Victoria only learnt it had been dumped from the project on the day of the federal budget.

In May's budget Mr Morrison ditched the state, saying Canberra would go it alone to sell the land to the highest bidder.

In his budget speech, Mr Morrison made release of the Maribyrnong land a centrepiece of the government's plans to tackle housing affordability, by fast-tracking the sale of more government-owned land.

"Land for a new suburb that could cater for 6000 new homes will be unlocked just 10 kilometres from the CBD, by releasing surplus Defence land at Maribyrnong," Mr Morrison said.

Speaking from the site soon after, Mr Morrison said that Maribyrnong was "where the budget literally hits the ground, because here as a result of the announcements we made in the budget, we will see Australians coming and making their lives here on this site. It doesn't get more tangible than that."

Victorian MP Michael Sukkar, also speaking from the Maribyrnong site in May, said the land release was part of "the most comprehensive housing affordability package ever handed down by a federal government".

But at the Senate estimates hearing on Tuesday, after Greens and Labor senators grilled senior defence bureaucrats and Defence Minister Marise Payne about the land, it emerged it will be at least two years and probably much longer before it is even sold.

Greens Senator Janet Rice – a Maribyrnong councillor for five years – asked how long initial preparation of the site for sale would take.

"It will take a fair amount of time," Mr Grzeskowiak said. "I would estimate you would be in that sort of two- to three-year period. We will go to market when we have done enough work on both decontamination and planning with the local authorities so that we have clarity about how the site can be used."

Asked about how the decontamination works would be done, Mr Grzeskowiak said that Defence intended to spend $60 million more decontaminating a small corner of the site, but that the rest of the clean-up would be done by the developer that bought the land.

"The remainder of the site which is by far the largest part of the site would be decontaminated by a purchaser of the site, whoever they may be."

He said the site was contaminated with asbestos, hydrocarbons, and waste from the Defence Science and Technology Group.

The Australian government bought the Maribyrnong land in 1908 and built an explosives factory that was in use for many years. During World War II, the factory was one of the largest employers of Australian women.

Victorian Planning Minister Richard Wynne has attacked the federal government over its sales plan, telling Parliament in May that Canberra's decision not to "continue to [deal] with Victoria on that magnificent parcel of land, the Maribyrnong defence land, is a really, really bad decision".

The huge chunk of land is about 80 per cent of the size of Docklands (which is around 160 hectares). It has three kilometres of frontage onto the Maribyrnong River.

One overseas developer has already approached the government and Maribyrnong Council with a plan to put a dozen 18-storey towers on the land. Two other development groups have also approached Canberra with an offer for the land, which was used by Defence until 2002 and has sat dormant ever since.

Senator Rice predicted it would be at least five years before the land was ready to be sold. "If this is the government starting to unlock land supply, you've got a housing crisis in this area for a long time to come."

And state Labor MP for the area, Marsha Thomson, said her concern was that a private developer would need to maximise profit. "This can only mean there would be an overdevelopment of the site."

In 2009, the clean-up costs for the entire site were estimated to be around $100 million.