Poor share market returns and rising property values and yields will draw investors into the residential property market this year, according to a leading expert.

Craig James, chief equities economist with CommSec, said that main headwind for the sector is weak affordability - driven by higher rents, property prices and interest rates.

"Australian housing markets are well positioned for both stronger activity and above-average growth in prices over 2008," said James. "Rents are soaring and there are only so many opportunities to take in shared accommodation," James said.

Australia's rapidly expanding population is expected to put extra pressure on housing. Over the 12 months to September, total population grew by 1.5% to 21.097 million people - the fastest growth rate in 18 years according to the Australian Bureau of Statistics.

Net overseas migration rose sharply by 179,100 - contributing more than half (56%) of the total population growth over the past 12 months. There were 278,500 babies born in the same period - a 5.8% increase from the previous year.

Nationally, WA recorded the fastest population growth at 2.4%, followed by Queensland and NT both achieving 2.2% increases. Victoria and the ACT added an average of 1.5% while NSW and South Australia saw population growth of 1%.

Queensland remained the top choice for interstate migrants with 102,200 people (almost 2,000 per week) moving to Queensland from other states and territories. This resulted in a net gain for Queensland of 27,000 people.

"While the supply of housing remains far short of demand, we're seeing that the housing sector is slowly starting to build more homes," said James. "The rental market is the tightest it's been in around 20 years and can't get much tighter. The strength in rental yield and a more uncertain outlook for the share market is likely to see more investment in housing over the coming months."

James said this expectation of increased investor interest in property, together with strong fundamentals for the owner-occupier market, point to stronger construction activity over the next 12-18 months. "The NSW housing market is fundamentally best-positioned for recovery, but the outlook also remains favourable for Victoria in 2008 and 2009, and Queensland in 2009."

James predicted residential property prices to grow by 10-15% in most capital cities this year compared to expected share market return of just 3% growth.

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