Exactly that: you've got a limited number of lots and a limited number of units that can be on those lots, so max the value of those units. With the lot supply and zoning, that equals replacing whatever might already be there with a giant McMansion. This drives up housing prices while also deleting the middle out of the market.
> that equals replacing whatever might already be there with a giant McMansion
That's the opposite of what we see around here. Developers buy houses from the 1940 to 60's (big houses on big lots), tear them down and build an 8-pack or 6-pack (depending on lot size) of tiny townhomes.
The only people building large houses are wealthy individuals building for themselves (as opposed to a development company building to sell) because they can afford to take the potential-profit hit and just build what they want.
