I know a real estate developer who was directly involved with Seattle "microhousing" a few years ago. Note; in America "microhousing" means "small apartment". They were building efficiency apartment buildings with sub-600sqft units. They were extremely popular especially with college students because they were able to offer units directly downtown, near the university and public transport, for unheard-of prices of $600/ mo, in areas where rents were more like $2000/mo and many people shared units with roommates. The problem is that development policies make this type of housing basically illegal; the city has decided what people want, instead of letting the market decide what people want. First they had to widen the spaces due to building codes that require walls to be at least a certain size, and that cut down the number of units per building. Then they had to provide more parking, even though their target market was college students with no cars, and that killed their cap rates further. And by a thousand cuts the unit rent went up from $600 to $800 and then $1100 and then at that point they stopped building them because they might as well offer "traditional" apartments for $2000/mo. And that's why small cheap apartments, like the kind that are normal in other cities, don't exist here in America. Not because people don't want them; because the government knows better.
This article looks like they are still looking for a loophole. It's probably a good thing; I wish them the best of luck.