Australians like our space; it’s good thing we have a lot of it. But do we always use it smartly? Australians now build and live in the biggest homes in the world, outstripping even the US and Canada. In the last 60 years, our houses have more than doubled in size – from 100 sq metres to 236 sq metres – while the number of people living in them has declined.

And this month a 236 sq metre house has sprouted up in the back garden of the National Gallery of Victoria. There are no bedrooms or bathrooms inside – in fact, there are no rooms at all, just a labyrinth of windowless walls that feel dark and oppressive. But then the maze ends, opening out on another house – this one 50 sq metres – that feels like a sudden respite. Despite being smaller, it feels roomier with its high ceilings and a beautiful play of shadow and light coming through slotted pine walls. It’s not the size, it’s the way you use it.

Home Truth is both an architectural artwork and a provocation, posed by the Melbourne studio Breathe for the NGV’s ninth annual architectural commission. Breathe is known for elegant Nightingale houses, smartly designed to maximise space and minimise environmental impact, during both construction and years of heating and cooling after. (“Right size housing for a climate crisis. Right size housing for a housing crisis,” the website reads.)

Some people may walk inside the smaller house at the NGV and scoff, trying to imagine all their furniture in there. But small houses are cheaper to buy and cheaper to run, Jeremy McLeod, the founding director of Breathe Architecture, points out.

“What if I told you that you could buy that for $100,000?” he says, pointing at the small house. “And this is $580,000?” he adds, pointing at the big house.

“Would you rather have more space? Absolutely. Can you afford it? No. Sometimes you have got to make the choice that actually works for all parts of your life.”

Australia has a housing crisis overlapping with a cost-of-living crisis and a climate crisis – and the lack of house-size options between tiny and enormous must be urgently addressed to help with all three, McLeod says.

“The biggest houses in the world don’t help with cost of living, given where interest rates are,” he says. “They don’t help a housing crisis, it means we build fewer houses. And it definitely doesn’t solve a climate crisis – we’ve got the biggest carbon footprint per capita outside of the Middle East and oil-producing nations.”

Home Truth is not only beautiful but environmentally friendly: when it is deconstructed in April, Breathe will use all of the wood to build actual houses. The walls are made from a low carbon material called Saveboard, which is created using recycled cartons and plastics that can be heated and reshaped to be used again and again. Nothing will end up in landfill.

McLeod is keen to stress that he is not ordering people to downsize; Home Truth is an opportunity to stand in two very differently sized houses and really feel how space can be used smartly, and appreciate how design makes our lives more environmental, more convenient and more beautiful.

“If people want a second bathroom rather than a back yard, that’s fine,” McLeod says. “I’m not saying that someone living in a 236 sq metre house should move into a 50 sq metre house – this is not about judgment. It’s about telling the truth and saying, this is what that much space actually looks like.”

Australia’s houses ballooned in the 1980s, a decade that saw shifts in financial deregulation and housing policy as well as a new era of individualisation. Within the home, people began wanting more space: home offices, spare bedrooms, rooms for each kid. Housing became a source of wealth rather than a human right, which meant houses got bigger while our gardens got smaller and less biodiverse. But when an extra bathroom could add $50,000 to the value of your house, why wouldn’t you chuck that on?

“It was Menzies’ great vision that we would be a nation of homeowners, and governments have tried to incentivise that through taxation,” McLeod says. “But take capital gains – people in other parts of the world can’t believe that you can buy a house for $1m here, sell it for $2m and you don’t pay tax on it. You’re incentivised to buy the most expensive house and play a stupid game.”

It’s not as though Australia hasn’t been innovative with housing before. McLeod points to the RVIA Small Homes Service, launched in 1947 by the architect Robin Boyd, which allowed Victorians to buy beautifully designed plans for houses under 100 sq metres for just £5 (about $400 today). About 5,000 homes were built from SHS plans, some 15% of homes in Victoria at the time.

“To this day, they’re still some of the greatest houses in Melbourne,” McLeod adds. “Australia has done great affordable housing that was beautiful and thoughtful, and delivered well for workers. These weren’t luxurious, but they had lofty ceilings, good light and good ventilation.”

While many of us may feel exhausted and depressed about the state of housing in Australia, McLeod is optimistic that we are on the precipice of great change.

“It is a horrible time for some but also an incredible time,” he says. “I don’t think there’s ever been a time that I can remember that is so ripe for innovation in housing. Never waste a good crisis!”