If I understand correctly, the Monterey Peninsula Water Management District is subject to an order from the (California) State Water Resources Control Board which prevents it from allowing new water meters[1]. New house construction in most communities with municipal water service will not be issued final approval without being connected to the water service; so this effectively prevents new construction. I strongly suspect (but have no evidence) that an onsite private well would be prohibited as well.

The City of Monterey has a page[2] describing this as well as a published wait list [3], with the first project having submitted in 2003.

I don't know if they deny construction permits, but you'd have to be pretty foolish to actually construct residences that can't be legally occupied because they lack potable water.

[1] https://www.mpwmd.net/regulations/water-permits/water-meters... [2] https://www.monterey.org/city_hall/community_development/pla... [3] https://files.monterey.org/Document%20Center/CommDev/Plannin...