A NSW government study says 20 years of housing supply is tied up in empty bedrooms in the homes of empty nest older couples or singles aged 50 and over.
The Department of Environment and Planning study found that, in Sydney, 600,000 homes had at least two bedrooms empty every night.
A similar number of homes had one bedroom spare, bringing the total number of under-utilised bedrooms across Sydney each night to a projected 1.8 million.
Planning Minister Rob Stokes said Sydney currently had a shortage of 100,000 homes - and poor housing utilisation made the problem worse.
He said other research had shown many older people would like to downsize, including moving to terrace housing in their neighbourhood, if they had the option.
"We need to find ways to make it easier for people who want to downsize to do so," Mr Stokes said.
Using 2011 Census data, the research also found an overcrowding problem, with 6 per cent of homes, mostly occupied by young families, not having enough bedrooms.
Mr Stokes said older home owners who wanted an apartment or smaller home with reduced upkeep and maintenance stress should not be locked out of that choice.
"There is no suggestion anyone in a big home should be pressured to leave... but we need to look at how to ensure people have a choice," he said.
The study shows the "housing inefficiency" problem is worst in Sutherland, Ku-ring-gai, Hornsby, The Hills, and Blacktown local government areas.
In each of these local government areas, between 8000 and 9380 households headed by a person aged 65 or older have two or more spare bedrooms.
In Ku-ring-gai, The Hills and Blacktown, more than 70 per cent of households by a person 65 or over have two or more spare bedrooms.
