You inadvertently stumbled on to the solution by installing stretch, since the fix is in dnsmasq 2.76.
The solution I first discovered here:https://www.raspberrypi.org/forums/viewtopic.php?t=128449#p919942
Then found the bug ticket here:
The diff patch to fix is here:https://bugs.debian.org/cgi-bin/bugreport.cgi?att=3;bug=858506;filename=dnsmasq-init.patch;msg=27
You can install a more recent version of DNSMASQ here:
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