Local council zoning laws will be overhauled to allow terraces, townhouses and two-storey apartment blocks near transport hubs and town centres in low-density residential zones in the Greater Sydney region, the Hunter, Central Coast and Illawarra.
Duplexes would be permitted in all low-density zones residential statewide while three- to six-storey apartment blocks would be permitted by default within 800 metres of transit hubs and town centres in medium-density zones and "appropriate employment zones".
The revamp is forecast to deliver 112,000 new homes - accounting for 30 per cent of the NSW government's 2029 Housing Accord target.
Sydney YIMBY, which advocates for more apartment living, described the move as a "very rare policy that actually meets the scale of our housing crisis head-on."
"By allowing such dwellings we can build denser, more liveable communities," chair Justin Simon said on Tuesday.
"Small businesses and high streets thrive in dense neighbourhoods and this will mean more people will be able to have their needs met within short walking distance of their home."
But he warned some powerful councils will attempt to blunt the powers.
"We should watch very carefully over the coming days because the reactions to this policy are going to tell you who's serious about resolving the housing crisis and who's just pandering to the wealthy landowning NIMBYs who created it," Mr Simon said, referencing not-in-my-backyard campaigners.
The overhaul comes after the Minns Labor government pledged to fund infrastructure and cut red tape as NSW tries to turn around a housing crisis.
Low-density zoning known as R2 currently restricts the types of residential developments that can be built, while many medium-density R3 zones prohibit residential flat buildings of any scale.
State environmental planning policy will be amended to enact the changes and take the decision-making out of the hands of local councils, the government said.
The plans will be on public exhibition for feedback from next week.
Planning Minister Paul Scully said reforms were about "delivering on our goal to see density done well".
"Ultimately we want greater diversity and greater density in our cities," he told reporters.
Only two of 32 local environment plans allowed terrace housing, despite it being a common option in Sydney's past.
"It's not rezoning, it's about ... reinstating permissibility," Mr Scully said.
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