Yes, but only when you are addressing a Gaijin directly. And it's "polite" rather than "proper".
The word Gaijin is a hot subject here in Japan.It's offending for most people because of the nuances associated with it.In fact,there has been a long standing debate about it in the reader's column of The Daily Yomiuri.You'll be surprised at the reaction a single word like gaijin can spark.
As for polite or proper,the higher the education of the person,the more likely that they used gaijin san or gaikokujin no kata even in casual conversations.
It's been common knowledge lately that the word gaijin has become somewhat politically incorrect.