I know you've had some concerns regarding improving your art, but I think that it's got a nice stylized look to it. Adding some curvature on the backgrounds would however make them match the characters a little better. I would prefer if the sprites just mirrored themselves instead of the paper spin animation, though you could also push it in the other direction by making everything else feel more papery.
I liked how the characters had several things to say regarding whatever situation they're in at the moment, it definitely felt like an environment. Since the game doesn't have time rewinds or pausing like Ghost Trick, a small "out of frame bubble" for speech you're not seeing would be a welcome feature.
The gameplay is neat, but I'd have liked for the player to have to move a bit more. Maybe the object you're in gets flung across the room and you have to navigate back, which would also be a good introduction to the characters that are there.
The music fits the game well. A small sound for when you're dragging and another for when you enter an object might be nice and maybe some ambient sounds for the area you're looking at.
I hope that you find the time to make an extended version, I definitely see the potential and love the premise of a hidden lust fairy in a city.