So evidently the main determinant of housing prices is "demand", not your hypothetical effect of houses getting cheaper because other houses are nearby.
What do you think produces "demand"? Why is there more demand for houses in Phoenix than for houses 200 km to the northwest? In some cases, of course, there are real differences in land quality: land that is close to waterways or railroads is more valuable for industry than land that isn't, land that's close to iron ore deposits is more valuable for automotive manufacturing, land that's frozen cold 9 months out of the year is less valuable for human habitation, and so on. But none of these explains the universally observed price premium for land in cities over land in the nearby countryside, which often amounts to three orders of magnitude.
It turns out that the main driver of demand for housing is being close to other housing. So building houses drives up the price of land nearby. Not down, as your theory predicts.
This seems to be conflating the symptom with the cause. I doubt housing is more attractive because there are more houses nearby; they're attractive because more services are nearby. Granted, they are going to correlate strongly but I think it's a mistake to conflate the two.
Consider the following:
1) A house with no neighbors within a 100 mile radius. But it has all the best restaurants, utilities, schools etc. within walking distance.
2) A neighborhood with hundreds of houses, but none of those services within 100 mile radius. It's a little isolated island of housing.
Which do you think would cost more to live in?
It seems like the price of each meal at the restaurants would need to be sufficient for the restaurant to operate for a month or two, perhaps a few thousand dollars. That seems like it would discourage eating at these wonderful restaurants.
Building codes, bureaucracy, and NIMBYism all contribute to construction costs, which in many cases severely constrict supply (SF being a shining example), and thus make existing units more expensive. Focusing solely on land prices is missing the forest for the trees. The problem is that there isn't enough supply to meet demand, so prices are skyrocketing.
Building more housing will drive prices down at best, or slow price increases at worst, but it doest affect housing affordability, which is the original statement I was commenting on.
One of your questions was “Perhaps you think the use-value of my house is primarily that it enables me to laugh at the suffering of the homeless beggars of Dhaka?”
I think omitting a proper response to that question is more courteous than discourteous.