The stage is set for a recovery in the Australia's housing market fuelled by extremely tight rental market and chronic undersupply according to an economist.

Savanth Sebastian, economist with CommSec said any downward pressure on interest rates is likely to a surge in people looking to buy their first home. "The calls for rate cuts as early as September are being voiced, and potential investors and homebuyers would not want to be caught napping," he said.

"In recent times a perfect storm of factors has ensured that the housing sector remains the least favoured asset class despite the high rental yields on offer. The home loan market has experienced its weakest start to a year in 19 years. The rate hikes have clearly done their part in spooking potential home buyers and investors from signing on the dotted line. Clearly rate hikes, rising living costs and high oil price have all adding to the stress on the household budget. The Reserve Bank has put rate cuts on the agenda - a far cry from the possibility of further rate hikes that homebuyers were faced with a couple of months ago."

This optimistic outlook comes despite the housing finance data showing the number of total housing finance commitments falling by 24.8% over the past year - the biggest fall in 13 years.

"If Australia's population wasn't rising sharply, the fall in home lending would point to lower home prices. But the rental market remains extremely tight, with rental yields expected to jump a further 10% over the coming year," said Sebastian.