Recent developments in the housing market have the potential to send it booming again, spurring concerns amongst economists and market watchers of a worsening debt situation in the country.

The green shoots appearing in the market, including the busy auction markets, low interest rates, the uptick in home lending, and the easing of serviceability rules by banks, all point to a recovery, said ANZ chief economist David Plank.

"The turnaround in the housing sector has been sharper than we forecast. Auction clearance rates, prices and finance have all beaten our expectations," he told The Australian Financial Review's recent survey.

Sydney and Melbourne reported gains in property values in August, up by 1.6% and 1.4% respectively. This is significant given the downturn that lasted almost two years not just in the two cities but across several parts of the country.

Also read: Property hotspots rise in Sydney

Market watchers are expecting prices in the two cities to continue its upward trajectory as interest rates remain low. The recent back-to-back rate cuts and the expectations of further rate discounts are expected to boost the borrowing power of buyers and investors.

Westpac economists, for instance, are expecting house prices in the two cities to rise by 12% by 2020. UBS market watchers are predicting a "mini-boom", with prices increasing 5% to 10% in the next 12 months.

Yarra Capital economist Tim Toohey also told the AFR that house prices could even reach "bubble territory" in the medium term.

"The impact of marginal shifts in interest rates upon asset prices can never be finely calibrated. It is possible that, should the RBA decide to cut a further 50 basis points in concert with renewed competition in the provision of finance, increased investor activity and a shift in demand by foreign buyers, house prices could accelerate at an uncomfortable pace," he said.

Such expectations are seen to pose a material risk for the economy, as these could boost household debt levels to new record highs.

Also read: Housing market still far from recovery?

Many market watchers, however, are thinking of a more subdued recovery in the market. BIS Oxford Economics' Sarah Hunter, for instance, said the price gains would likely not be sustained.

"The recent bounce back in house prices in Sydney and Melbourne looks like it's a result of limited supply and a move by owner-occupiers to enter the market," she said.

However, she noted that a moderate increase is possible next year as certain market restraints take effect.

"Improved market conditions will encourage sellers into the market, while slow-growing household income will limit how much buyers can borrow, even when the impact of cash rate cuts and the loosening of lending rules by APRA are taken into account," she said.

But it seems the house-price growth is not amongst the main concerns of the Reserve Bank of Australia. Recently, RBA Governor Phillip Lowe said it would only trigger an alarm if credit growth balloons rapidly, which, he believes, is unlikely at the moment.

"It is nevertheless likely that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieving more assured progress towards the inflation target," he said.