In short, because of land-use restrictions. From a great post by Alex Tabarrok in Marginal Revolution.
"Why has housing become so expensive in high-productivity places? It is true that there are geographic constraints (Manhattan isn’t getting any bigger) but zoning and other land use restrictions including historical and environmental “protection” are reducing the amount of land available for housing and how much building can be done on a given piece of land. As a result, in places with lots of restrictions on land use, increased demand for housing shows up mostly in house prices rather than in house quantities."
Alex's blog post references this paper by Stan Veuger, Philip G. Hoxie, and Daniel Shoag, from aei.org, "Moving to Density: Half a Century of Housing Costs and Wage Premia from Queens to King Salmon | American Enterprise Institute - AEI"