I am not sure if banks care about lower loan balance vs high. Sure, high is more lucrative, but there are a number of government-backed loan programs that could make up for it.

As for cities, yes. They like the house pricing go up. It helps with school budgets, particularly. Then it goes into positive feedback loop with better schools raising house prices, too.

For cities like seattle, it's not hard to see houses in different price bands (single tech earner, couple tech earner) and so on. Hard to find a solution, unless the big employers diversify their locations.