That's part of it, but the mistake being made in that paragraph is the confusion of demand with quantity demanded. In particular, demand doesn't vary with quantity demanded.
However, the effect you're discussing here is kind of real in a sense. When the marginal utility of housing increases for *other* people, density arguably becomes more desirable for me, which is kind of like the demand curve shifting up. These are called bandwagon goods and discussed here:
In theory, the bandwagon effect could be so strong that parts of the demand curve are upward-sloping. Solutions like this are not, technically, prohibited by the laws of mathematics, just the laws of economics. (And arguably of physics--see paper for conditions where these kinds of bandwagon effects imply the amount of housing in the city would have to be negative).
In practice, this effect exists but just can't overcome the normal, non-weird economics that says "making more of a good makes the prices fall." Economists have spent 100 years looking for these weird kinds of demand curves and never managed to find one; moreover, such a curve would have bizarre implications, e.g. that building new offices providing high-paying jobs would cause housing costs in San Francisco to fall, while a drop in demand (like discovering the drinking water was contaminated) would push prices up.
That's part of it, but the mistake being made in that paragraph is the confusion of demand with quantity demanded. In particular, demand doesn't vary with quantity demanded.
However, the effect you're discussing here is kind of real in a sense. When the marginal utility of housing increases for *other* people, density arguably becomes more desirable for me, which is kind of like the demand curve shifting up. These are called bandwagon goods and discussed here:
http://econfac.bsu.edu/research/workingpapers/bsuecwp200804gisser.pdf
In theory, the bandwagon effect could be so strong that parts of the demand curve are upward-sloping. Solutions like this are not, technically, prohibited by the laws of mathematics, just the laws of economics. (And arguably of physics--see paper for conditions where these kinds of bandwagon effects imply the amount of housing in the city would have to be negative).
In practice, this effect exists but just can't overcome the normal, non-weird economics that says "making more of a good makes the prices fall." Economists have spent 100 years looking for these weird kinds of demand curves and never managed to find one; moreover, such a curve would have bizarre implications, e.g. that building new offices providing high-paying jobs would cause housing costs in San Francisco to fall, while a drop in demand (like discovering the drinking water was contaminated) would push prices up.