Case in point: I've moved to a city 40% the size of the one I grew up in so as to be able to afford housing at all and it's been great. A friend who stayed there recently purchased a 25% smaller apartment for 40% more in comparison to mine. It's not even funny at this point.
You have generally more time for all the things you mentioned when you don't commute 2h a day.
As for new homes: even now investment demand will gobble up any new housing that's built, as the former grows much faster than the latter. Induced demand for housing if you will.