Sydney's supply of rental homes declined for the fourth consecutive month in August, pulling the city's vacancy rate down to its lowest since 2018.

The latest market update from the Real Estate Institute of New South Wales (REINSW) showed a decline in Sydney's vacancy rate to 2.6%, down from April’s high of 4.3%.

REINSW CEO Tim McKibbin said this was the lowest vacancy rate recorded in the city since the 2.4% in May 2018.

"The latest lockdown is biting hard, with businesses shut and people out of work," he said.

The drop was due to the sustained decline in Sydney's inner and outer rings. Mr McKibbin said mum-and-dad investors in these areas are selling their hard-earned investment properties to stay afloat.

"With so little stock on the market, these properties are being snapped up by home buyers. The flow-on impact is the removal of these properties from the residential rental market," he said.

The limited supply of rental properties has already put upward pressure on rents. According to SQM Research’s latest data, weekly rents for houses in Sydney have risen by 10.2% annually. Weekly unit rents, on the other hand, increased by only 0.1% over the year.

Outside Sydney, vacancies also dropped substantially in Newcastle.

The tight rental conditions are also apparent across regional New South Wales, particularly in the areas of Central West, Mid-North Coast, Murrumbidgee, Northern Rivers, Orana, and South Coast.

"The last 18 months have been a rollercoaster ride of ups and downs across New South Wales, leaving landlords and tenants alike doing their best to respond to unpredictable market conditions," Mr McKibbin said.

"This unpredictability will likely continue as we see the impact of current lockdown conditions continue to trickle through to vacancy rate figures in the coming months."