Experts say those areas where populations remain below pre-COVID levels are unlikely to stay that way for long, putting further pressure on an already tight housing supply.
KPMG's analysis of Australian Bureau of Statistics data shows that areas across the southern end of the eastern suburbs, including the suburbs of Randwick, Kensington, Coogee and Maroubra, saw their population fall by 11,100 as of December compared to the end of 2019.
This is the largest decline in population for any area of Sydney in the three years to December.
The estimated resident population of the inner city region - which includes the CBD and suburbs of Pyrmont, Zetland, Newtown and Glebe - decreased by 10,500 compared to the end of 2019.
At the northern end of the eastern suburbs, including Bondi, Vaucluse and Paddington, the population fell by 4,700 and the number of residents in the lower North Shore fell by 4,100.
Terry Rawnsley, KPMG demographer and director of planning and infrastructure economics, said areas traditionally popular with newcomers and international students had some of the biggest population losses in the early stages of the pandemic.
Terry Rawnsley, KPMG demographer and director of planning and infrastructure economics, says areas traditionally popular with newcomers and international students had some of the biggest population losses in the early stages of the pandemic.
Rawnsley said the inner city and eastern regions were losing population as jobs dried up and international students and workers returned home, but multicultural areas such as Canterbury were also losing population, still down by about 1,800 at the end of last year.
Poor housing affordability has also been a key factor in the population decline, as has the tsunami and increased demand for tree change and smaller families, particularly in wealthy areas.
"Before COVID people may have been maintaining a holiday home outside Sydney, they lived in the inner city and went to the beach at weekends, now the situation has flipped," Rawnsley said.
"[Also in areas such as North Sydney, Mosman and the northern eastern suburbs] ...... Fewer people are having children, there are more two-income couples without children ...... And the population decline predates COVID."
The decline in population has been accompanied by a decline in the number of people per household - a trend that accelerated during the pandemic - resulting in demand for housing outstripping supply.
Rawnsley said the shortage of housing was exacerbated by an increase in immigration earlier this year as international students returned home. He said areas such as the southeast, inner city and inner west may soon return to pre-COVID population levels or have already done so.
However, the population in the East, North Shore and parts of the Northern Beaches may be slower to recover, he said, as the limited supply of new housing makes it difficult for key workers to move or stay in the area.
"Without an influx of new housing, there will be downward pressure [on the population] until those older demographics are cleared and you have new young families coming in," he said.
Ethos Urban director and demographer Chris McNeill said Sydney had been hit hard by the population decline because its higher education institutions made it popular with international students.
Meanwhile, migration has effectively stagnated and there has been a move away from densely populated areas as some people move to holiday homes and weekend getaways on the coast or in the countryside.
O'Neill said the strong migration numbers meant the losses would be reversed, with some areas already recovering to or exceeding pre-pandemic levels.
"In the year to September 2022, as a country, we added 418,000 people. Of those, 308,000 were from overseas, so migration is soaring," he said.
Michael Lowdon from Ray White Residential Sydney CBD said demand for inner city living was now back to pre-COVID levels.
Buyer demand is outstripping the limited supply and rents have bounced back from the steep drop in the early days of the pandemic to reach record levels.
Lowdon said demand for one- and two-bedroom units priced under $1,000 to rent is strong, with properties typically receiving multiple applications within 24 hours.
For our regular inventory ......," he said rents have largely returned to pre-Covid levels, but some of those [rents] were down about 30 per cent, so it took about two years of growth to come back." However, he noted that demand remains subdued for more expensive rents.
Lowdon expects demand in the inner city to continue to firm up, but he thinks the intense competition for rentals will be short-lived.
"I think it's a short sharp shock to the urban market. You've had this general influx of Chinese students, which has exacerbated the shortage because they're all coming over at once [after the Chinese government announced it would stop recognising online degrees]."
"I think once these students ...... settle down, [the demand] will come back in three to six months."