Sydney's rental market reversed its slight turnaround in August after it reported an increase in vacancy rates in September, according to the latest report from the Real Estate Institute of New South Wales (REINSW).

Over the month, vacancies in Sydney jumped from 3.5% to 4.1%, with the inner- and middle-ring regions both reporting higher vacancy rates at 5.5%. The increase in the level of vacancies indicate that the city's rental market has slowed again, said Tim McKibbin, CEO of REINSW.

"Property managers are telling us that there are fewer properties coming onto the market and those that do are taking longer to rent. Older properties in need of upgrading are particularly problematic, as tenants become more picky about where they choose to live," he said.

The Newcastle region followed Sydney's uptick in vacancy rates, up from 1.2% to 1.5%. Wollongong, on the other hand, reported a drop from 2.6% to 2.1%.

A separate report from SQM Research has similar findings. The report said the elevated vacancies in Sydney continue to push city rents downwards.

Regional markets stood to gain from the exodus of renters in the Sydney. McKibbin said vacancies in regional suburbs remained tight, with only a few recording an increase. Vacancies in Albury and Coffs Harbour increased slightly to 0.8% and 0.9%, respectively.

"Tenants are seizing the opportunity to secure a rental property that suits both their budget and desired lifestyle. This month’s results show that COVID-19 continues to have a significant impact across the whole of New South Wales and it’s unlikely that things will settle for a while yet," McKibbin said.

Of all regional markets, New England recorded the highest vacancy rate at 1.3%. However, this was already a decline from the 1.6% in the previous month. Central West, on the other hand, had the lowest vacancy rate at 0.4%.