Australia's first rental affordability index has found Sydney is the most expensive city for renters, with nothing affordable between Newport in the north and La Perouse in the south.

Even suburbs once deemed cheap such as Lidcombe and Lakemba have been pushed into the unaffordable category by spiralling property prices, leaving renters with an odious choice: live in poverty close to the city or move further out and spend hours commuting.

The index found the most affordable area in the greater Sydney region is Black Springs, almost 200km from the central business district.

The index, a joint project between peak housing advocate National Shelter, Community Sector Banking and SGS Economics & Planning, will be collated quarterly and used to lobby state and federal governments to address the critical shortage of social and affordable accommodation.

NSW households on average weekly earnings of $1474 have to spend 28 per cent of their income to rent in Sydney, the report found. If they need to live close to the inner city, they have to put more than 60 per cent of their income towards rent, leaving them in severe housing stress which is defined as spending more than 30 per cent of total income on housing.

"Sydney is a basket case," Shelter NSW executive officer Mary Perkins said. "The most affordable areas are not even within cooee of Sydney."

The proportion of renters has increased as property prices have boomed, with data collected by the Australian Institute of Health and Welfare showing one-quarter of all households were renting from a private landlord in 2011-12, up from 18 per cent in 1994-95.

National Shelter executive director Adrian Pisarski​ said while the mortgage default rate was relatively low, those in the rental market were struggling with ever-rising costs.

"Housing is the biggest household cost and renters don't get any relief," he said. "They face the choice between long and expensive commutes or living somewhere they cannot afford. Whatever choice they make they end up with not enough income to live a reasonable life."

Middle income renters who are saving for a deposit on a home tend to snap up the less expensive properties, putting pressure on lower income households to move further beyond the city fringes.

"The problem with rental affordability is it's now really dividing our cities," Mr Pisarski said.

Of the index's top five most affordable areas in the greater Sydney region, Mount Druitt and Silverdale were the closest to the central business district, although still a commute of more than 50km.

Mr Pisarski said the lack of affordable housing near jobs and services affected productivity.

"If hundreds of thousands of people are having to commute long distances, that puts pressure public transport, it clogs up the roads, it sucks up time and efficiency," he said.

National Shelter is advocating for national strategy whereby governments could transfer social housing to the community housing sector, allowing them to maximise their capacity to borrow funds and invest more in creating affordable homes.

Community Sector Banking head of business Joe Sheehan said Australia needs 180,000 new affordable houses to be built every year simply to keep up with demand.

"There is now every chance your children may never own their own home," he said. "It is a dismal outlook. All we are hearing from the housing not-for-profit sector is that there is a real urgency to act now."

NSW Council of Social Service deputy chief executive John Mikelsons said recent figures showing that the list for social housing had plateaued at 59,000 applicants waiting up to 10 years revealed the entrenched nature of the housing shortage in NSW.

"In Sydney, Australia's most expensive housing market, the numbers are particularly bad," he said.

"New thinking is desperately needed to reduce the crisis numbers of people waiting to access social housing. A stable roof over your head is a basic need. We know without one, people find it almost impossible to get and keep a job, to send their kids to school or access services like healthcare."