The problem with your example, and the problem in real life, is that people are making decisions at too low of a level and property rights (never mind the needs of society) are being overridden. They end up voting on how something directly affects them, and place little to no consideration for the rights of others. They push the problem onto someone else, on people who have less of a voice in the democracy.

You're right about there being no simple solution. Even voting on higher level issues (like providing affordable housing) is perilous. Deciding upon something without specifics just opens up the floodgates for abuse. I've seen housing built on land unsuitable for construction. I've lived in a couple of neighbourhoods that narrowly escaped being razed for highways (to the point where parts were razed and some infrastructure was built).

Even long term urban planning, something specific enough for voting on and distant enough to avoid being personal, has proven to be less than successful.