Rules designed to improve rental affordability in Sydney are being used to build "luxury" studio units, part of a mini boom critics say is squeezing the city's lowest income lodgers further out of the market.

A series of "unintended consequences" has also prompted one Sydney council to request an exemption from the same planning controls, which it says are ill-equipped for the rise of "mega boarding houses" in its suburbs.

Introduced in 2009, the state government's affordable rental housing provisions include incentives that permit a developer to build and lease smaller, and therefore cheaper, "micro apartments" in buildings of a larger scale than otherwise permitted in low-density areas.

But as these "new generation" boarding houses become an option for students and key workers in increasingly expensive inner city areas, very low income earners at the bottom of the private rental market are being pushed out.

"We have a crisis of affordable housing ... and so boarding houses have traditionally met that market," said Homelessness NSW acting chief executive Digby Hughes.

"But boarding houses, many of them are now going upmarket, so they're actually after a different sort of clientele."

One such example is Annandale's McCarthy Maisonettes on Parramatta Road, which was approved by Leichhardt Council as a boarding house with 24 self-contained rooms in 2012.

The recently completed building is now offering a "brand new architect designed complex of 24 luxury furnished studio apartments" from $355 a week.

This is above the median weekly asking rent of $300 for studios in Annandale or $350 in Sydney, according to data from Fairfax Media's Domain Group.

The site's owner, former Cronulla Sharks chairman Glenn Coleman, said there were no new, high-quality boarding houses in Annandale and this was reflected in the price.

"I call $350 a week affordable," Mr Coleman said.

"I think it's delivering a product that is needed in the market and I think that's reflected in the fact that we've rented 23 out of 24 rooms."

Hal Pawson, from the University of NSW's City Futures Research Centre, said the "mini boom" only became a problem if such properties displaced traditional boarding houses, where tenants might pay between $150 and $200 a week.

"If that kind of building is being pulled down to be replaced by a new generation of boarding house then the planning relaxations that have been put there with the expressed intentions of facilitating more affordable housing are in a way resulting in less," Professor Pawson said.

But Paul Adabie, the boarding house services manager at the Newtown Neighbourhood Centre, said tenants in areas like Surry Hills, Ultimo, Glebe and Lewisham were being evicted for this reason.

"It is a developer's dream to get through planning much easier and you can build these high-spec studio flats," he said. "What's affordable to one person is still very unaffordable to people on fixed-term benefits."

A low-income household could afford a weekly rent of about $370 a week; those on a very low income $230 a week, according to government figures.

Marrickville Council has received 63 boarding house applications since the 2009 changes,compared with just eight in the three years prior. It is seeking an exemption to use its local controls to better address the development of "mega boarding houses" like a 155-room proposal in Camperdown.

A Department of Planning and Environment spokesman said it was considering ways to improve the state's affordable housing supply.

"This involves consultation withvarious stakeholders on how to develop new ways of delivering the right type of affordable housing options in the areas where it is needed," the spokesman said.

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