If you haven’t given yourself a New Year’s resolution yet, here’s one for you….

Take advantage of this early stage of the new property cycle, buy the right property in the right location and you’ll do very well in the long term.

The good news is that Santa has brought us one of the presents at the top of our wish list – confirmation that we are going to have a great year in the property markets of Australia.

I see 5 green lights to selectively invest in now….

1. A stable Australian economy
The Australian economy’s vital signs are healthy and it is performing much better than anyone would have expected this time last year. Ultimately, indicators like strong employment levels, wage and productivity growth and manageable inflation drive prosperity and the demand for goods, including property.

But watch out – every year there is one “X factor”, one unknown that pops up and surprises us and the economy.

Two years ago it was the subprime crisis overseas and its effects on the world financial markets. Last year the Australian government’s financial stimulus, comprising deep interest rate cuts and fiscal stimulus, had our markets surprised on the upside, with their resilience at a time when almost everyone was expecting a recession.

By definition (being an unknown X factor), I have no idea what will crop up this year. It could be rising interest rates stalling our markets, or maybe further financial problems overseas. Who knows? Something always crops up to surprise us – so be ready!

2. Increased Demand but a Lack of Dwelling Supply
Remarkable growth in immigration levels over the last few years plus a baby boom have boosted demand for housing. However despite a shortage of dwellings around Australia builders are just not constructing enough new homes and developers are not producing enough new apartments or townhouses to meet demand.

The problem is that for most new medium and high-density development projects to become financially viable to allow banks to lend for new development and to encourage developers to take the commercial risk, the end value of the apartments or townhouses will need to rise by at least 20% above current market prices.

Putting all this together, a shortage of supply and continuing demand, plus the increasing cost of development (including higher land costs, infrastructure costs and building costs) means that the value of new dwellings will have to rise substantially soon. This will of course have a positive impact on established property prices.

3. Demographics
Our population is fragmenting, with more people living alone; which means we need more dwellings just to house the same number of people. At the same time we are living longer. All of this means that more people will be seeking more accommodation both as tenants and owner occupiers, pushing up property values and rentals.

4. Rents will strengthen in 2010
With demand for rental properties outstripping supply, rents increased strongly over the last few years. Record low vacancy rates, fewer investors bringing new properties onto the market and low housing starts all mean residential rents will rise even further over the next few years. The rental boom has only just begun.

5. Low Interest Rates
Last year saw 3 interest rate rises and even though it is likely that there will be further interest rate rises this year, we still have relatively low rates compared to long term trends.

All this makes 2010 a great time to buy properties, as the beginning of this new economic cycle and this early stage in our property cycle offers great opportunities to create long term capital growth.

But as you’ve heard me say before… you have to be careful because not all properties will perform well.

Our property markets will be fragmented and patchy. Some suburbs will outperform while others will underperform. Some houses within those suburbs will increase in value and some will be duds.

As interest rates increase, affordability will be one of the key issues that limits property price growth in some suburbs in 2010.

Affordability will continue falling as property prices increase and interest rates rise. But this will affect some more than others. First home owners and those living in the working class and outer suburbs are likely to be affected more.

On the other hand those who own properties in the more affluent suburbs of our capital cities, which have exhibited strong capital growth over the last few months of 2009, are sitting on a heap of equity and won’t really be worried about affordability.

These inner and middle ring suburbs are likely to keep performing well again in 2010 and this is likely to lead to a 3 tiered market; especially in Melbourne, Sydney and Brisbane.

The more affluent suburbs near the city and the water will become even more expensive and strongly outperform the averages, as owner occupiers and astute investors chase the small numbers of properties coming onto the market in these locations.

As more and more home buyers and investors find they are priced out of the inner ring they will start looking for affordable properties in neighbouring middle ring suburbs. These will also increase in value, but maybe not to the same extent as the inner ring suburbs.

However the outer suburbs are usually where home owners are more interest rate sensitive, with many currently struggling to meet their mortgage payments. With the likelihood of further interest rate rises in 2010, property values in these suburbs are likely to languish.

So while the news is not the best for first home owners and renters, the current property markets offer good opportunities for investors who buy selectively.