Sydney’s rental market may be improving for renters, particularly in the western suburbs, with the vacancy rate rising in some suburbs dramatically thanks to an oversupply of available homes.

While Sydney’s vacancy rate only rose 0.2% in May, according to Domain, some suburbs like Parramatta jumped by as much as 0.4%. That may not seem like much, but the vacancy rate was just 2% prior to May, reflecting a 20% increase in rental property vacancies.

Parramatta had the most apartments available to rent, with 156 according to Domain. Other than Parramatta, three other suburbs had more than 100 vacant apartments, while Blacktown and Kellyville had the most vacant apartments (Blacktown was almost double Kellyville with 106 vacant houses against 54).

Sydney Suburbs with most vacancies May 2016

Source: Domain

It’s a big rise in the vacancy rate over just a month, but really it’s no surprise given the extraordinary level of development there,” said Domain Group chief economist Andrew Wilson. Mr Wilson says it is just pockets of Sydney facing an oversupply problem, but the market would even out over time if the rest of Sydney remained under supplied.

Parramatta-based real estate agent Ewin Almeida has told Domain that the oversupply would be more widespread than just Parramatta and there would be pain ahead for investors in Homebush West, Campsie, Bexley and Hurstville.

Property investors have clearly been targeted by banks over the past year or so, with Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) all implementing measures to restrict lending to domestic lenders and in many cases cease lending to foreign investors.

Heaping more pain onto the property market, a number of Australian states have also raised their stamp duty and land taxes.

NSW has imposed a 4% stamp duty surcharge on foreign buyers of apartments and houses from next week, and also face a 0.75% land tax surcharge from the 2017 land tax year. Queensland has imposed a 3% charge on foreign purchases, while Victoria will hit foreign buyers with a monster 7% stamp duty surcharge and a 1.5% surcharge on land tax.

According to the Property Council’s Glenn Byres, offshore investors account for about 15-20% of pre-sales in our capital cities.

Foolish takeaway

Despite the RBA’s recent rate cut and signs that investors had been returning to the market, state government moves could see property prices crumble as foreign investors exit the market, and the oversupply of apartments worsens in some of our capital cities.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.