Yes. But the high house prices feed through to higher land prices so the newly built houses will also be more expensive than they otherwise would have been.

In most places, except the obvious exceptions, the government can also create new land for construction.

Absolutely. But not all land is created equal, most people want to live near a big jobs market, meaning near a big city. So the price of this land will inevitably go up.that being said, I am sure there is a lot municipalities could do to make housing more affordable.

True. Still, one alternative model to consider is one where the recent trend of opportunity concentrating in a few big cities could reverse. Either due to market forces (cheaper everything outside of the big cities), remote work becoming more prevalent, or both.

I would live to see this. But are there any indications that this is actually happening?

Indications of a net change - not sure, but individual examples, yes. For example, some parts of Eastern Germany have seen a trend reversal in recent years. Also a number of previously poor ("cheap") regions in southern Europe are experiencing a massive investment and tourism fueled boom. Portugal seems like a good example for that.