I am able to create a page after selecting the folder using create button (+Create)as you mentioned.
Though the URL is not changing from 'folderlevel1' to 'folderlevel2', the functionality is working as expected and page is getting created with the given allowed path properties at my end.
I think it might be an aem bug as url is not changing even after selecting the folder.
Thanks for your Response.
I am not even able to see the option (Page) in drop down when I selected folderlevel2, please have a look at the picture.
Can you please conform there are no templates allowed after content, I mean no template should have allowed path as /content(/.*)?
Why I am saying this is because if you have at least one template allowed after content (/content(/.*)?), then that create page option is getting activated. So please check all of your templates and reply me.