Sydney rental vacancies are at their highest level in two years - but remain well below 2%.

The Real Estate Institute of NSW says Sydney vacancies increased 0.3 percentage points to 1.5% in April. It says many former renters are becoming first-home buyers, freeing up rental stock.

Vacancies are now the highest since October 2007 but still at a level where supply does not match demand.

Newcastle went against the state trend, with rental vacancies down from 2.2% to 1.7%, the REINSW says.