Many of the places with very high housing prices have very modest homes on very small amounts of land. The San Francisco Chronicle ran a story about a graduate student seeking a place to live, "visiting one exorbitantly priced hovel after another."
It is not at all uncommon for land to cost more than the housing that is built on it, in those places where politicians have made housing unaffordable with land use restrictions under pretty names-- all the while lamenting the lack of affordable housing.
So long as politicians can get some people's votes by publicly feeling their pain when it comes to housing costs, and other people's votes by restricting the building of housing, they can have a winning coalition at election time, which is their bottom line.
Economists may point out that the different members of this coalition have conflicting interests that could be better resolved through competition in the marketplace. But how many economists have ever put together a winning coalition?
So long as voters prefer heroes and villains to supply and demand, this game will continue to be played. It is not because supply and demand is too "complex" to understand, but because it is not emotionally satisfying.