Many may conclude Sydney is in oversupply from the number of cranes we can see in the sky, but experts say this is too simplistic.

Latest figures show more than 50 per cent of NSW home loans were taken out by investors in January — the first time since the Australian Prudential Regulation Authority’s crackdown on investors.

But still, an insufficient number of new homes are being built, and experts say Sydney needs more investors, not less.

An artist's impression of S Pagewood by Silkari, a new development in southeast Sydney.Source:Supplied

Rental demand in NSW increased by 12.5 per cent in the year leading up to February 2017, while an 8 per cent jump was recorded from January 2017 to February 2017, findings from REA Group’s latest Property Demand Index report show.

Rents are going up so fast close to the city that tenants are looking to live in lifestyle suburbs that are 30km or more away from the CBD.

REA’S rental hot spots — the ones most searched — offered beach lifestyles at a more affordable price.

A three-bedroom house like this in Wetherill Park can be rented for $485 per week.Source:Supplied

All but one of the suburbs on the list are close to water. Outer western Sydney suburb Wetherill Park bucks the trend — ranking ninth on the list — instead having a major shopping centre and affordable housing.

REA Group Chief Economist Nerida Conisbee said Sydney needed rental housing across the board.

She said along with being an expensive place to buy a home, renting was also unaffordable for people earning average or below-average incomes.

“In Sydney, you’d need to have a household income well over $100,000 to be able to afford to rent an average home,” she said, adding that the average household income in Sydney was about $90,000.

Altessa in Gordon is about to release 141 units to the market on Saturday.Source:Supplied

AMP Capital chief economist Shane Oliver said Sydney is still in undersupply and investors could help alleviate the supply shortfall.

The current rate of construction will slow in the second half of this year, with the number of building approvals peaking, he said.

“I don’t think blaming investors is the answer here. It comes back to years and years of undersupply in a market where demand is incredibly strong,” Mr Oliver said.

He also pointed out that the vacancy rate had spiked from about 1 per cent earlier this decade to the current 1.9 per cent, but said this did not mean Sydney was close to a state of oversupply.

“As the new supply comes, I expect the vacancy rate to go up more,” he said.

“But we’re not at the point where we’ve got oversupply, otherwise the vacancy rate would be a lot higher and there’d be a lot more empty buildings.”

Managing director of CBRE Residential Projects David Milton called the oversupply claims “a beat-up”.

“Sydney is fundamentally undersupplied, is still playing catch-up and it was only last year where the supply equalled the demand for that year,” he said.

He suggested that a bulk of the reports on oversupply is based on building approvals, rather than work commencing, which fails to reflect the actual level of construction.

“What we’re seeing now is a lot of the developments commencing now were originally approved four, five, six years ago.

“So a lot of what’s purported to be approved won’t happen for an extended period, sometimes for years.”

CPM Realty’s managing director Sam Elbanna said everyone thinks Sydney is in oversupply because of the number of cranes in the sky, but this was incorrect.

“What people don’t realise is that every time we see something under construction, it effectively means the properties have been sold, because developers can’t finance the construction until they achieve a certain number of presales.

“How can it be oversupplied when everything you see under construction has already been sold?”

He said the counterargument of investors and negative gearing pushing up prices was “nonsense”.

“If we create a disincentive for investors to invest, we’re going to create a massive conundrum for the people who want to rent property; there won’t be any rental property available.”

Originally published as Are there enough new homes being built?