Democracy is not an easily defined concept in practice.

In theory, Democracy is simply the idea that the government is formed from the will of the people... but there is no single will of the people. How do you decide, then, what the will of the people is?

Many of us have grown up with the idea that 'majority rules' is democracy, but why? What makes 51% a magic number?

Most modern democracies don't like the idea of a majority suppressing a minority, so we put restrictions on what the majority can do. Is that undemocratic? Is the Bill of Rights undemocratic because it blocks the will of the people?

There are no easy answers to these questions.

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.

Two wolves and a sheep voting on what's for dinner is democracy, illustrating a common failure mode of the worst form of government except for all of the others.

Claiming "DEMOCRACY!" doesn't prevent people from having rights. Rights are not about majority rule but about the kind of place "people" (sometimes a minority) think "people" (often a minority) deserve to live in.

In this case, it is fair for the middle neighbor's outcome to depend on more than his two direct neighbors. And it's also fair for the middle to balance their own wants with the ones of their neighbors. But for sure everyone gridlocking each other is not a solution for progress.

I usually use "democracy" to describe a situation where there are regular transfers of power through reason, persuasion, and cooperation and not through violence or the threat of violence. I'm not sure that it applies to this case about your neighbor, unless you are stopping them through a threat of violence, in which case it is certainly undemocratic.