Sydney's rental market continued to tighten over the past month, with its vacancy rate dropping for the third consecutive month, according to the Real Estate Institute of New South Wales (REINSW).

Vacancy rates across Sydney appears to be on a rollercoaster in recent months — the Inner Ring region, for instance, had been reporting ups and downs in its vacancy level, only to drive the recent drop when its vacancy rate declined from 4% to 3.1%.

Vacancy rates in the Middle and Outer Ring regions, however, increased over the month to 3.9% and 2.3%, respectively.

REINSW CEO Tim McKibbin said the recent lockdowns have caused uncertainties in the city's rental market, which are likely to continue over the next few months.

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

Outside Sydney, vacancies remained stable in Wollongong but rose significantly in Newcastle.

More homes became available in Newcastle, pushing its vacancy rate from 1.6% to 4% over the month. This is the region's highest vacancy rate since 2015.

"Many member agents in the area are reporting high vacancies, likely attributable to a combination of factors including high rental prices, a reduced level of inquiry and recent lockdown conditions," Mr McKibbin said.

Across New South Wales’s regional markets, rental conditions remained extremely tight, despite the slight increases in vacancy rates in some areas. 

Albury, Coffs Harbour, and New England registered declines in vacancy over the month while Murrumbidgee and the Riverina maintained their current vacancy levels.

Mr McKibbin said the tight conditions across Sydney and the rest of New South Wales spell good news for property investors.

CoreLogic figures show that prices in Sydney have grown by 2% during the month, hitting a median value of $1.02m. The city achieved a total return of 21.1%.

"Increases in median prices are encouraging many landlords to sell their investment properties and realise the gains, adding to rental stock shortage,” he said.