There are multiple reasons.

1. Prices (especially wages) are sticky. Interest rates you can adjust overnight, but to get the adjustment of wages can easily take years.

2. Economy is not actually nicely behaving equilibrium seeking thingy, but a complex, chaotic system with various time constants. So we actually need a body that works to stabilize the mismatches of aggregate supply and demand. So it is not "artificially propping" demand, but trying to actively keep demand and supply aligned. And people may be "demanding" better housing, but it does not mean they can afford to.

But surely, if people want better housing and can't afford it, the right thing for each of those individual people to do would be to save their money until they can, not load up on debt and buy something they don't want as much.

Granted, that would cause unemployment in the industries that people would rather give up consuming from, but maybe that would free up some talent to go into building houses - isn't that how the capitalist system is supposed to work, that things people don't want don't get produced?