Nicely put. I recently bought a new house and was thinking about this same concept. I moved to a area with a high COL, but the markup on houses was much higher than other goods (still high, but not as big).

So when applying for my loan, they use debt to income ratios to determine if you're eligible. So let's say you bought a house and the price (yearly) was 50% of your income. If one house was at 500k and the other at 200k, your 50% for other goods is vastly different. My mortgage came out to 3600/month, right about 50%. But that still leaves another 3600 for other goods. If my mortgage was 50% at 1200, then I would have 1200 leftover for other goods, which just doesn't go nearly as far. But the bank sees these two scenarios as exactly the same.