I think you're very confused about how development in cities works. It's the parking requirements, large lot requirements, large size requirements etc., plus the general absurd difficulty of getting any kind of permit to build anything anywhere, that makes housing so expensive in the first place.

If we took a pro-development attitude and made it easy to build everything by relaxing requirements, the market would respond with a much broader variety of housing options, including some large family-oriented spaces but also a lot of small single-person oriented spaces.

As you say "housing should be a bad investment," I think that's true to a degree, but the best way to make that happen is to relax the rules and make it an extremely competitive market with abundant supply. Then the price of housing would be mostly determined by the cost of construction, which would be much cheaper than the current market where prices are driven by scarcity to societally damaging heights.