The city is second only to Hong Kong in terms of housing unaffordability, with an average home costing more than 13 times the median salary, according to a Committee for Sydney report released on Thursday.
Housing was a chronic issue for the state capital, representing a threat to its future if nothing was done, the think-tank's chief executive Eamon Waterford said.
Young Sydneysiders at the start of their careers were feeling the biggest impact through restricted opportunities due to the problem of finding affordable housing, according to Mr Waterford.
Premier Chris Minns said a median house price of more than $1 million was "intolerable" for the next generation and crippling the economy.
"It's completely unfair for the next generation of young Australians who don't feel that they're able to take a piece of Sydney ... and write the next chapter in this great city's history," he said.
Rental availability and affordability are also at crisis levels, with 35.3 per cent of Sydney renter households experiencing the financial stress of paying more than 30 per cent of their monthly incomes on housing costs.
The report identified $1.5 billion in lost talent due to outward migration and the diminished appeal of the city, on top of $6.8 billion in lost productivity and $2.9 billion in reduced innovation, including fewer patents and start-ups.
"If we don't take urgent and sustained action, chronic housing unaffordability will continue to erode Sydney's competitiveness on the global stage and our city's long-term economic success," Mr Waterford said.
The report recommended three key actions to help fix the issue, beginning with the introduction of a zoning target to include affordable housing in new developments in all areas.
It also recommended the government invest in building significantly more social and affordable housing, as well as increasing homes with good access to transport, open spaces, schools and other services.
The government said it was already working towards increasing the number of homes built in NSW, with the state falling behind Queensland and Victoria in per-capita terms.
But the premier denied charging developers extra fees of up to $12,000 per home from October, to help cover the costs of additional infrastructure, would make increasing supply even harder.
Mr Minns said the change had already been flagged by the previous government and factored in by suppliers.
The Community Housing Industry Association NSW said the crisis had been worsened by chronic neglect from successive governments, but there was an opportunity to address it in the upcoming state budget.
"It's time for bold responses from the Minns government to do what families in our state need, by funding social and affordable housing, starting with the state budget," chief executive Mark Degotardi said.
"56,000 families and individuals on the social housing waitlist will be watching to see if the state government is willing to take the steps needed to give them a secure, long-term home in this budget."
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