Perhaps a change could be added to ignore 127.0.0.1 and 127.0.1.1
addresses returned by default?

Dnsmasq supports such an option, though it would need to be added to
libvirt as it regerates the dnsmasq conf file used each time a network
is started.


Add following by default to dnsmasq.conf generated by libvirt
---------------
ignore-address=127.0.0.1
ignore-address=127.0.1.1
---------------

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https://bugs.launchpad.net/bugs/1326536

Title:
  libvirt's dnsmasq setup will read /etc/hosts on the host, resulting in
  odd resolution behaviour on the VM

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