Australia's housing affordability has reached its highest level since the 1999, but market conditions still don’t seem to be in favour of first-home buyers, according to the latest study by the Housing Industry Association (HIA).

HIA's Affordability Index showed the highest level of affordability since 1999, with all capital cities reporting an improvement over the June quarter. The index measures affordability by taking into account the latest dwelling prices, mortgage interest rates, and wage developments.

It now requires less than 1.2 times the average income to service a mortgage on a median-priced dwelling in capital cities, said Tim Reardon, chief economist at HIA.

"The combination of lower interest rates, slow house price growth and relatively steady wage growth over the past three years have driven this improvement in affordability," he said.

This improvement, however, does not translate to easier market conditions for many first-home buyers.

Reardon said the biggest hindrance would-be buyers face is no longer the cost of paying a mortgage. He said the surge in newly-built homes over the past five years had kept a lid on house price growth, making housing more affordable.

Despite the favourable conditions, however, first-home buyers are unable to break into the market due to red tape, which makes it harder for them to obtain a mortgage.

"A decade of red tape has made it significantly harder for first-home buyers to obtain a mortgage for purchasing their first home,” Reardon said. "The additional red tape imposed in recent years means that banks are increasingly lending to those that already own a home."

Reardon said the reforms made since the Global Financial Crisis have been forcing first-home buyers out of the market, contributing a decline in homeownership. He said the collapse of financial institutions during the GFC had compelled Australia to review the regulatory landscape of the banking sector.

"Since this time, the treasury and other regulatory agencies have been working to reduce the risk of residential mortgage business within the banks for fear that they may once again be required to assume the banks' risk," he said.

Reardon believes that while banks claim that they are "open for business", they have narrowed the criteria for a would-be borrower to be considered as "high quality", making it more difficult for many to obtain housing finance than it was prior to 2014.

"The problem is that in the pursuit of this 'unquestionably strong' financial system, the regulatory squeeze has forced the banking sector to eliminate much of the flexibility in the mortgage market that made homeownership accessible for households of variable credit quality," Reardon said. "Ensuring that homeownership remains an attainable aspiration for Australian households is an equally important objective."