Few pundits thought that was remotely possible only months ago. After the eye-popping 14 per cent price surge in 2014 – which lifted the city's median house price to $874,000 – rising unemployment and anaemic wages growth were expected to cool things down.

But the Reserve Bank's decision last week to cut official interest rates to a 60-year low of 2.25 per cent appears to have reignited the market, especially investor demand. The auction clearance rate in Sydney on Saturday was a super-strong 82 per cent and there were reports of reserve prices being smashed.

"The rate cut was almost a red rag to a bull for investors," says Dr Andrew Wilson, senior economist at Domain Group, owned by Fairfax Media which publishes The Sydney Morning Herald. "It's just ticking all the boxes for them." Some analysts are now saying prices could rise another 10 per cent this year, maybe more.

Sydney's frothy property market is a major worry for Reserve Bank governor, Glenn Stevens. But bigger troubles in the national economy – especially a weakening jobs market – demanded a cut in interest rates.

Stevens summed up this tricky policy conundrum on Friday: "Developments in the Sydney market remain concerning, but in the end we did not see these trends as overwhelming a case for a further easing in monetary policy that was made on more general grounds." Reserve Bank officials have cautioned investors about the dangers of taking excessive risk in the housing market and yesterday Stevens drew attention to the greater "scrutiny" of investor lending by the financial system regulator.

But so far, the warnings have fallen on deaf ears. Investors continue to pile into property, spurred by super-low borrowing costs, generous tax breaks and soaring prices. Property data shows that an investor who purchased the median-priced home in Sydney three years ago has seen that asset appreciate by nearly a quarter of a million dollars. One in every three houses that changed hands in Sydney last year cost over $1 million and about one in every 15 were over $2 million, according to CoreLogic RP Data.

"Despite the megaphone warnings we've been getting more investors not less," says Wilson. Figures released yesterday showed lending to housing investors in NSW jumped 12.3 per cent in December to a record $6.3 billion.

In contrast, Sydney's beleaguered first time buyers have stayed on the sidelines – or given up in despair. The number of first home buyers in Sydney taking out new housing loans is wallowing near record lows. Commsec estimates the proportion of first-time buyers in the national home loan market eased from 14.6 per cent in November to 14.5 per cent in December – a ten-year low. In Sydney the share of first time buyers was even lower, at just 7.1 per cent.

While borrowing costs are low thanks to the level of interest rates, the pace of house price growth has made saving for a deposit harder and harder. The challenges first home buyers face in accumulating a down payment is made more difficult by low interest rates and weak wages growth.

Last week's interest rate cut may have created fresh momentum into Sydney's property market but the price surge is increasingly at odds with trends in the national economy. Figures released on Thursday showed the unemployment rate in January climbed to a 12-year high of 6.4 per cent. The bleak jobs report punctuated a week of turmoil in federal politics including the unsuccessful bid by Liberal party backbenchers to topple the Prime Minister. There are signs the instability and policy confusion plaguing the Abbott government is taking a toll on business confidence. On Wednesday Commonwealth Bank chief, Ian Narev, warned that "weak confidence" had become a significant economic threat.

"Businesses need the certainty to invest to create jobs, and households need a greater feeling of security," he said.

"That requires implementation of a coherent long-term plan that clearly addresses target government debt levels and timeframes, infrastructure priorities, foreign investment, business competitiveness policies and, above all, job creation."

Last week the Reserve Bank trimmed its expectations for this year's economic growth and said unemployment would now "to rise a bit further and peak a bit later" than previously expected.

While the NSW economy has performed well compared to other states recently, the labour market has worsened markedly in the past three months. The state's seasonally adjusted jobless rate hit a 5½-year high of 6.3 per cent in January. The Bureau of Statistics says 244,300 people in the state were looking for work in January, 14,200 more than the previous month.

But for now, the deteriorating economic outlook is not dampening the appetite of Sydney's property investors.

This week's gloomy jobs data means another rate cut is on the cards, possibly next month.

"More rate cuts are just going to fuel the investor fire in Sydney," says Wilson.

For years there have been questions about whether Australian housing is overvalued. Many analysts from other parts of the world have taken a look at our property prices and warned we're destined for a fall. But local economists consistently reject this analysis. They point out that while Australian house prices were high, there were fundamental reasons underpinning the market including, our dispersed urban patterns, our high incomes and a chronic under-supply of new dwellings.

But local doubts are emerging about the Sydney's property market. This week Paul Bloxham, a former Reserve Bank official who is now chief economist at HSBC, issued a report to clients warning that house prices in the city were in danger of over-inflating and that Sydney's property market was "at risk of a bubble".

Bloxham says the extraordinary level of investor demand is a "tell tale" sign of the growing risk. For months investors have consistently accounted for about 60 per cent of all home loans being approved in Sydney – a higher share than at the peak of the city's last great boom in the early 2000s.

Bloxham believes the proportion of investors points to a dangerous "speculative dynamic" in the market.

"Increased investor activity is driving housing prices to rise faster than fundamental factors suggest they should in the Sydney market," he says.

Bloxham is predicting Sydney house prices will fall in 2016.

"We believe that growth in Sydney housing prices is currently running at an unsustainable pace and that any further growth is likely to be met by housing price declines in future years, when interest rates do begin to rise," he says.

Sydney's recent history shows that house price booms can eventually take a toll on the whole economy. The city's last great property surge, which lifted the median house price by about 160 per cent between 1997 and 2003, left the city's households the most indebted in the country. The aftermath slowed the city's population growth and constrained state economic growth for several years.

The circumstances of the latest boom are different. Household debt is not rising as quickly and, this time, the run-up in prices has been accompanied by a spike in new housing supply.

Even so, Bloxham says Sydney has "lessons to learn" from what happened a decade ago.

No matter how this boom ends, Sydney won't be left unchanged.

It underscores the fast-changing nature of the city's economy and its growing integration with the global economy.

"This current move in house prices shows Sydney is shaking off its 1950s, car-based past and heading towards being a real global city," says Terry Rawnsley, an economist with the consultancy SGS Economics and Planning.

He says rising property prices in Sydney have helped drive the trend away from traditional detached houses to higher density living.

"Higher prices are making those high density residential projects more feasible which means more stock comes online which, in turn, feeds the demand we are seeing," he says.

The boom also highlights how Sydney's housing market is being influenced by global economic trends and investment flows.

"Foreign demand has been rising, reflecting a global search for yield and an on-going trend increase in foreign interest in the local housing market, particularly from China," says Bloxham.

Rawnsley says properties in Sydney and Melbourne have now become a "global asset class" and foreign investment is helping to boost the supply of housing in both cities.

"Without this international money coming in, a lot of these residential building projects would not be getting off the ground," he says.

The recent fall in the Australian dollar is likely to make Sydney's residential property even more attractive to foreign investors.

The implications of the Sydney's latest property boom go much deeper than debates about booms and bubbles. It's a sign of how the city is changing.