I can't say I'm really keen on government planners driving this nonsense. Interfering with how people want to live borders on stalinism.HUH? Where is this mandated? And how would this be different than other government regulations (such as minimal lot size requirements, and federally-funded lending programs) that encourage people to build big houses?
That's what happens.
The real problem, of course, is that it reduces the value of the neighborhood over time. Land holds its value; structures depreciate. So a monster mansion on a 1/4 or even 1/5 acre lot has its value mostly in structure, while a modest ranch on 1 1/2 acres has its value mostly in the land. It's a setup for a real crash in 25-30 years when the structures won't be worth much (especially given the shoddy work that passes for upscale construction these days.)
See my reply, # 29. It is mandated to a large extent, at least in the greater Seattle area. Insofar as gov't regulations decrease the supply of available land on which to build, supply and demand take care of the rest. Here, demand is constant or increasing, and prices go through the roof.