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Doesn't fix it. People end up buying bigger homes just as a place to park money. The root of the problem is that housing is a subsidized investment; you're getting free money from the government by taking out a mortgage, and the market will figure out ways to take advantage of that with silly results.

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Why does this matter? The problem stated is lack of supply generally, not that people want bigger homes, right? Who cares if people are parking their money in a bigger home if they only have a single home?

Bigger homes take more space, and that's the constrained resource in places where houses are expensive.

The lack of supply is because of a lack of desirable land. I don't think viewing it through the lens of "houses" getting more expensive is correct, as many old homes being purchased for 500k+ near me will be immediately torn down. There's a finite supply of land in driving distance of a city and bigger suburban houses mean less homes can be built. If you don't view it like that, bigger homes still require more materials and man-hours.

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