NSW has fallen behind other states in addressing housing shortages despite being the most in need of new homes.
The state is building five new dwellings for each 1000 residents every year, compared with roughly eight to nine per 1000 residents a year in Queensland and Victoria.
"This is Australia's biggest state. We're Australia's largest city. We have the largest increase in rents and we've also had the largest increase in house prices," Premier Chris Minns said on Wednesday.
"And yet we're the lowest on the Eastern Seaboard when it comes to new housing approvals. Something's out of whack there.
"Not only are we not producing enough to stand still, we're going backwards."
NSW faces needing to house 85,000 additional people a year for the next 20 years, with the population tipped to reach 6.1 million across Greater Sydney by 2041.
Mr Minns is calling for more urban density closer to the city, in part to save the government on having to build costly infrastructure to support greenfield developments.
The premier was speaking at an event hosted by Western Sydney University think tank, the Centre for Western Sydney, to mark 100 days in government
Think tank executive director, Professor Andy Marks asked if it is possible to build more dwellings closer to the city, as well as on its fringes.
"I think one of the things that's been been missing from the debate is the fact that you can do both," Prof Marks said.
Mr Minns noted the vast majority of public transport infrastructure built over the past decade was east of Parramatta, while the majority of new housing was west of Parramatta.
"There's not the infrastructure in place to cope with the population as it stands today, not let alone the targets that have been proposed," he said.
"We're not saying that's the end of development on Sydney's fringe - of course not - but it's got to be a better balance."
The government is attempting to negotiate with councils to approve more dwellings and has received some resistance, Mr Minns suggested.
"We don't want to have fights with mayors and municipalities across Sydney but we believe it's essential to provide opportunities for young people," Mr Minns said.
Earlier this month, figures showed Sydney had overtaken Canberra as the most expensive capital city in which to rent a house.
The median rental price for a home in Sydney ballooned to $700 a week, according to the Domain Quarterly report, while Melbourne was $520 a week and Brisbane was $580.
