Sydney's residential construction figures are at their lowest levels since the 1950s according to BIS Shrapnel economist Rob Mellor.

The latest figures from BIS Shrapnel show that NSW construction is now experiencing its fourth year of decline with only 29,300 houses and units starting construction in the last financial year. The state's poor housing sector led a nationwide downturn in construction of 4% in the three months to June.

Mellor said desperate measures were needed from the NSW government to encourage investors back into the market. "Investors are sitting on the sidelines," he said. "The Sydney market is now so dominated by high-rise density that, unlike previous cycles or as in other states, it needs investors to return to the market before construction can get under way."  

Managing director of Rismark, Christopher Joye, said the financial services industry needs to respond with more innovative product solutions geared to addressing consumer needs. "There's a patent lack of creativity in the mortgage market," Joyce said.

Sydney's rental sector is also suffering. "As residential construction has fallen by about 50% from its peak, I expect the vacancy rate might get to below 1% next year, which it hasn't been since 1986," said Mellor. The current vacancy rate is 1.5%.

Mellor labelled Sydney's housing woes "a disaster".