Under proposed reforms, maximum penalties will soar from $22,000 to $110,000 to remove the financial incentive for agents to dupe anxious clients in Australia's most expensive property market.
Agents making more than that penalty will also come under the hammer, with fines of three times their commission.
But the industry questioned whether higher penalties would act as a deterrent or ministers were trying to "elevate their own importance".
Underquoting involves homes being advertised under the agent's reasonable estimate of the property's likely selling price.
While NSW law dictates it must be updated when, for example, a vendor rejects a higher offer, several investigations using data from real estate price-tracking websites have shown underquoting - deliberate or otherwise - is rampant in some suburbs.
Agents setting an unrealistic price and hoping to watch it grow were "misleading buyers, wasting their time, wasting their money and taking them on an emotional, demoralising roller-coaster," Fair Trading Minister Anoulack Chanthivong told reporters on Thursday.
"This is about bringing trust and confidence to the market so that buyers have a realistic chance of looking for their forever home," he said of the proposed reforms.
Agents will be mandated to fix a price or price guide on all advertising.
Modelled on decade-old rules in Victoria, agents will also have to publish a Statement of Information explaining to buyers how the quoted price was calculated, including comparable sales and suburb median prices.
But Real Estate Institute of NSW head Tim McKibbin said the sector was being used as convenient punching bag.
Federal consumer laws can be applied and enforced, where fines can reach millions, to stop bait advertising, he said.
He questioned whether additional state penalties would act as a deterrent.
"After 25 years of making the same announcements and doing the same thing, I can't see anything different," Mr McKibbin told AAP.
"Consumers are starting to see what government is really using underquoting as a platform to elevate their own importance rather than consumer protection."
NSW Fair Trading issued more than 100 penalty notices for underquoting offences in 2024.
More than 40 inspectors have been deployed throughout the state for enforcement and 89 investigations launched in 2025.
Mr Chanthivong used the licence suspension of Josh Tesolin as an example of the system at work.
The high-flying Sydney agent raked in millions of dollars from selling luxury homes by allegedly underquoting the price of more than 100 properties.
The proposed changes will be introduced in 2026.
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