If every developer was able to build as much housing as they ever wanted, the quality would go up through competition.

In pretty much every other sector of the economy, the government regulates safety, and quality comes via competition. Housing should be no different.

But because we've artificially throttled the amount of housing that can be built, the best way to improve profits is to push down the quality as the buyers don't really have an alternative

I'm not an economist but my armchair opinion thinks you're wrong about quality going up; competition is about driving pricing down and undercutting others, cutting corners as much as possible.

Take Amazon or the Chinese webshops, they've flooded the market with products that do the same thing but cheaper, but whose quality is way lower.

Take the acquisitions of e.g. power tool brands by investors, who then use the brand's brand awareness and quality inertia to cut costs and boost their profit margin.

Take hotels, which used to feel luxurious but which have over time been redesigned to require minimal maintenance and personnel.

The only competitive market where they try to one-up each other on quality is aimed at the rich where money is not an issue. The middle ground is disappearing.

Competition would have that effect… in a perfect market, which is a theoretical construct. Especially in context of urbanism, building an abomination can hurt the entire community and takes space from proper construction.

Here my thoughts about ideal markets https://news.ycombinator.com/context?id=46085880