So does this nation-state have democratically-adopted rules directing the city to act differently on housing? If not, how is this claim relevant to the comment about how democracy is supposed to work?
Plus, of course, there is a bunch of people who understand "democracy" to be simply "the rule of the democrats" :)
Even assuming a given ruling actor is principled and incorruptible, an archetypal "good king", there would be many other aspirants who want to replace them by means fair or foul. Large piles of money just lying around have always been an attractive nuisance for thieves.
This thread is about that abstract process, and indeed whether "housing crisis" is enough justification to start overriding local autonomy.
For example, in California the state government recently restricted the power of local governments to regulate ADU construction. This was a case of state democracy overriding local decisions because of their negative externalities when taken in aggregate.
Basically the whole point of a government hierarchy is to resolve the multi-agent coordination problems that routinely occur. The government is the equivalent of the mob boss in the prisoner's dilemma, and without it we will devolve into a tragedy of the commons.