It is billed as sale of the century for Asian billionaires, capable of shattering Australia’s house price record. Elaine, a Victorian mansion on Sydney Harbour, which went up for sale on Tuesday, is tipped by its estate agent to sell for up to A$100m ($87.5m) becoming a potent symbol of buoyancy, or froth, as some say, in the city’s property market.

“Foreign buyers, particularly in China, are buying into Sydney as a secure long-term investment,” says Howard Tanner, a prominent architect who worked with the Fairfax family, the media company founders who own the property, on proposals for renovating it.

“There is every reason to believe it will achieve a record sale,” he says.

Indeed, the near-legendary Chinese and other foreign buyers are credited with fuelling property hotspots across the globe, from London to the Algarve to Miami Beach.

And in Australia too, foreign buyers, together with cheap money and supply constraints, have helped push up house prices, prompting some commentators to warn of an emerging housing bubble in some of the country’s bigger cities.

Prices in Sydney jumped 15.1 per cent last year, pushing the median house price to A$763,169. In Melbourne and Perth, property prices increased 8 per cent, according to Australian Property Monitors, an information provider to the banking and property industries.

“I think we are seeing the creation of a spectacular bubble on top of a spectacular property bubble,” says Steve Keen, a professor of economics and author of a blog called Debtwatch.

“Affordability in the market is being shot to pieces with house prices increasing to about six times incomes in Sydney,” he says.

Mr Keen is a long-time bear on Australian house prices, and famously lost a bet with an economist at Macquarie Bank in 2008 over his claim that prices would soon fall sharply. Two years later he walked 225km from parliament house to Mount Kosciuszko wearing a T-shirt saying “I was hopelessly wrong on house prices – ask me how” to honour the wager.

But after a period of price stagnation following the global financial crisis, the more recent rapid clip of increases prompted the International Monetary Fund and the OECD to wave red flags.

“Looking forward, attention should be paid to the risk, as in any situation where asset price inflation accelerates, that a prolonged period of rapid price growth could give rise to expectations-driven, self-reinforcing demand dynamics and price overshooting,” said the IMF in November.

The price increases are being driven by a combination of historically low interest rates, increasing foreign investment, particularly from China, a shortage of quality housing and generous tax incentives for investors, who can write off property losses on other income.

The end of a decade-long mining investment boom has dented business confidence and caused unemployment to rise to almost 6 per cent. In response, the Reserve Bank of Australia has slashed interest rates to 2.5 per cent and pinpointed housing construction as a key growth sector for the economy.

“On present indications, the most prudent course is likely to be a period of stability in interest rates,” said Glenn Stevens, RBA governor on Tuesday.

He cited business uncertainty, subdued business investment and rising unemployment as reasons for keeping interest rates at a historic low.

Investors have responded by helping to drive the value of new mortgage approvals to a record $26.9bn in November last year, a 25 per cent increase on the same month a year earlier, according to Australia’s statistics bureau.

“Falling interest rates have electrified the market,” says Andrew Wilson of Australian Property Monitors. “Investors in Sydney are making a flight to bricks and mortar.”

Estate agents are also tapping into growing foreign investor and ethnic Chinese interest in Australia. McGrath Estate Agents has set up Mandarin-speaking units to tempt high-end Chinese investors looking for luxury properties and the growing number of middle class investors.

“Sydney is becoming more international as global wealth eclipses local wealth,” says John McGrath, chief executive of McGrath Estate Agents. Last year, an unnamed Chinese buyer paid $52m for Altona, the most expensive house ever sold in Sydney.

The Australian Foreign Investment Review Board approved A$59.1bn in property investments proposed by foreigners in 2011-12, compared with A$41.5bn the previous year.

It approved $16.2bn of Chinese investment across a range of different business sectors, according to its annual report. Nine out of 10 of the 601 applications made so far for a new class of Australian visa targeting wealthy foreigners with $5m or more to invest are Chinese, underlining the growing importance of Chinese investors to Australia.

For sceptics such as Mr Keen the growing reliance of the Australian housing market on foreign investors is a dangerous trend. But for others it is part and parcel of the growing pace of globalisation.

“Our view is that there is growing integration of the property markets across Asia,” says Ray White, of Ray White Real Estate, which has offices in New Zealand, Indonesia and is about to open one in China.

And even former bulls are tempered in their pessimism. Says Mr Wilson: “I’m not a bubble advocate – my guess is there will be a moderation in price, rather than a sharp correction.”