Million dollars houses would be regarded as unliveable in other parts of the US.
The first time one of these places sells (with black mold still in the basement, asbestos in the walls, and lead paint the children's room) the value of the nearby houses goes up and everyone starts looking to sell THEIR old beat up black mold and asbestos special. It starts a boom and suddenly a whole neighborhood of 300k$ houses become 1million$ grey monstrosities.
This all drives up the cost of new construction as well (which is always a little more pricey than buying an older home) and so you get overpriced mansions that you describe as well, but the root cause is the removal of the entire "bottom" of the market. It is now almost impossible to find what Americans call a "fixer-upper" in some cities.
I really do hear you on the housing quality - it's ridiculous what people are willing to put up with over there. We have friends living in the southern bay area who pay 3.5k for a 2.5 bedroom apartment in an apartment complex - the whole thing calls itself "Luxury Residencies". Ain't no luxury there. Like you describe everything is built extra cheap: from the walls, to the kitchen appliances and the plumbing. There is a massive top-loader in their supply closet that sounds like it runs on it's own ICE, built in the 50s. In Europe this would be considered a very basic apartment but it's already considered 1-2 levels higher than average and not even 3 years old.
I do think there is something to your Galapagos syndrome theory.