Diversifying neighbourhoods and ensuring there are enough homes close to major work hubs will be the driving force behind the NSW government's housing policy as it tries to fix an affordability crisis.
In the past decade, NSW built seven homes compared to Victoria's 10 for every 1000 extra residents, and Treasurer Daniel Mookhey said too many people were paying the price for that choice.
As well as completing fewer houses on a per-capita basis, NSW also built fewer homes in total than Victoria last year, despite having 1.5 million more residents.
Sydney rent prices have risen 10 per cent in the past year as supply dwindles.
Addressing the NSW Productivity Commission's housing symposium on Monday, the treasurer said if the state's planning system had allowed more density - such as 10-storey dwellings instead of the average seven - an extra 45,000 homes would have been built.
Treasury estimated the additional homes would have contributed to a two per cent increase in Sydney's private dwelling stock.
"That could have lowered apartment prices and rents by 5.5 per cent ... for a NSW citizen that is a saving of $35 a week or $1800 a year in rent on the median apartment," Mr Mookhey said.
Premier Chris Minns said Sydney needed to have a fair distribution of housing growth and density across the city.
"It's not fair to have the vast majority of new entrants and young people go to the western fringes of Sydney without access to the public transport and infrastructure that they've got in the eastern suburbs," he said.
"Every time we say 'no' to density, or reasonable high rises closer to the CBD, we say to a young person, 'we don't want you to have a stake in the future of Sydney'."
Mr Mookhey said Sydney needed to increase the number of homes near major work hubs and quality schools to ensure lower socio-economic families were not further disadvantaged.
Productivity Commission data showed on average, a 2.7 to 3.3 per cent premium to reside within a high-performing school zone, adding $36,000 to $44,000 to the price of a typical Sydney home.
"We have to raise educational standards in all schools, but we shouldn't tie a person's ability to get access to an excellent public school to where they can afford to live," he said.
"The inability to build homes close to where people work in effect imposes a commuter tax on those who cannot afford to live close to their jobs.
"It is unfair and it's not sustainable."
The Minns government has previously announced it would create pre-approved "pattern book" of designs for terraces and mid-rise developments in a bid to help reduce housing approval times.
A consortium of business groups on Monday launched their proposal to deliver up to 75,000 extra homes in medium-density developments along major Sydney road corridors.
The plan, from Business Sydney, Business Western Sydney and the Housing Industry Association, suggested rolling out apartments on the dilapidated Parramatta Rd in the inner west as a first step, followed by Victoria Rd and the Great Western Highway.