There's a feedback loop, but what matters here is the elasticity, which is less than one. We can measure this empirically.
New housing lowers prices via the mechanism of adding supply, which is basic economics and how we expect markets to work.
New housing could raise prices if it also made the city a more desirable place to live and shifted people's preferences, such that there was more demand to live there after the new housing is built.
If you think it's unclear which of these effects would dominate, luckily we have empirical data that over and over and over shows adding housing supply does indeed lower prices on a local level. This is a fairly well established result that replicates well.
You currently seem like you're at the stage of understanding the thought experiments pretty well, but not understanding them on a DEEP level. For example with your hypothetical, this has actually happened before! Kind of. China built a bunch of 'ghost cities' basically out of nothing, and while there was an initial craze of speculation and tons of investment and building... nobody went to live in those cities most of the time. And now they're deeply distressed assets worth basically nothing. When nobody actually lives in the ghost city, it doesn't matter that they have super dense housing. There's no demand. (the only reason they might be worth something is that the CCP very, very much does not want to pop their huge housing bubble and is likely to bail out some of the parties involved)
edit: I'm actually thinking about drawing out the weighted DAG graphs here to make the conceptual stuff easier, but it would be pretty long. I'd love to do this as a guest post.
There's a feedback loop, but what matters here is the elasticity, which is less than one. We can measure this empirically.
New housing lowers prices via the mechanism of adding supply, which is basic economics and how we expect markets to work.
New housing could raise prices if it also made the city a more desirable place to live and shifted people's preferences, such that there was more demand to live there after the new housing is built.
If you think it's unclear which of these effects would dominate, luckily we have empirical data that over and over and over shows adding housing supply does indeed lower prices on a local level. This is a fairly well established result that replicates well.
You currently seem like you're at the stage of understanding the thought experiments pretty well, but not understanding them on a DEEP level. For example with your hypothetical, this has actually happened before! Kind of. China built a bunch of 'ghost cities' basically out of nothing, and while there was an initial craze of speculation and tons of investment and building... nobody went to live in those cities most of the time. And now they're deeply distressed assets worth basically nothing. When nobody actually lives in the ghost city, it doesn't matter that they have super dense housing. There's no demand. (the only reason they might be worth something is that the CCP very, very much does not want to pop their huge housing bubble and is likely to bail out some of the parties involved)
edit: I'm actually thinking about drawing out the weighted DAG graphs here to make the conceptual stuff easier, but it would be pretty long. I'd love to do this as a guest post.