Byron Shire faces unique cost-of-living pressures amplified by being a year-round tourist destination, the NSW Independent Planning Commission said on Thursday.
A two-month cap would ensure enough landlords returned their homes to availability for long-term rentals, it said.
A 60-day cap on short term rentals would mean Byron Shire had the some of the most severe restrictions in the country, Airbnb Head of Public Policy for Australia and New Zealand Michael Crosby said.
"Airbnb and our Byron Shire Host community were surprised and disappointed with the recommendation to introduce one of the harshest restrictions on short-term rental accommodation in Australia," Mr Crosby said on Friday.
The cap could hurt the town and its small businesses and jobs, he said.
The cost of housing in the Byron Shire has risen significantly in recent years, with growth outpacing other parts of regional NSW and Sydney.
About 1300 homes, or one in 12 homes in the Byron Shire, are being used as short term rentals, many of which had previously been let out on on a long term basis.
The NSW government sought advice last year after the Byron Shire Council proposed halving its 180 day cap on short term rentals.
The commission's advice went further, saying the council's proposed cap of 90 days would not incentivise landlords to return their properties to the market and could have the unintended consequence of harming business activity.
Mr Crosby also criticised the commission, saying industry stakeholders were not consulted on the 60-day cap.
"The report fails to provide compelling evidence for how a 60-night cap would materially address housing issues in the region, and recommends a limit on hosting that was not canvassed with industry stakeholders during the extensive consultation phase," Mr Crosby said.
Airbnb provided a lengthy submission to the commission opposing the proposed 90-day cap.
Current settings for short term rentals mean residents and accredited accommodation operators were being treated with contempt, Trish Burt from resident lobby group Neighbours Not Strangers said.
The issues in the Byron Shire were acute but there continued to be major impacts across NSW, she said.
"Everyone's residential title deeds, the conditions on them, have been retrospectively altered without financial compensation," Ms Burt told AAP on Friday.
Planning Minister Paul Scully said he had received the commission's report and intended to review it in coming weeks.
It was important to maintain the function and character of a community while also keeping up its appeal for tourists, he said on Thursday.
"I will consider the findings in this context," he told AAP.
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