I like having a separate bedroom. It has nice carpeting, a big bed, a clothing closet and blinds that make the room pitch black. The walls are isolated for heat and noise and the only window is facing the garden, not the busy street on the other side. No electronics to distract me, nothing to look at. The temperature is lower than the rest of the house (on purpose). It's really magical for me to sleep there and I have the best sleep. I used to sleep in the living room and it was terrible. Fan noise from the central ventilation system, lights from various electronic devices, noise from the street-side window, noise from the dishwasher and it was way too warm in the winter.

So yes. Having a bit more space in your home can raise your standard of living.

You do realise that this is the epitome of first world problems though ?

I wonder what will be next when most people will have reached that level of quality of life.

I am not sure it is. At least not in a bad way. Things like sleeping, eating and showering are universal. There is a quite defined line, in terms of space, where things gets fundamentally worse. Even in terms of pure functionality, as in e.g. functionalism, you just can't make things smaller at some point without significant downsides.

You can easily have it with 600-800ft

That is correct, but have noticed that a tiny home, RV or an apartment under 400 square feet usually doesn't have a (properly) separated bedroom.

I've seen a couple of tiny homes that had a bedroom in the form of a mezzanine above the living space. With all the heat rising upwards I wouldn't be able to sleep with all the heat trapped in the sleeping area.

Why would you need a large home for that? You can have a small home with multiple rooms.

But that's a small home, not a tiny home. But even small homes (if they exist at all) cost at least 500k in many cities.

The problem with your question is that we haven't defined what "wasted space" is.

If I want to have a couple of children is wanting one or two extra bedrooms really wasting space? And if it is, wouldn't you still call it a loss of quality of life compared to the alternative?

Tiny home = Small trailer in a trailer park... but marketed to the middle classes = Low-quality housing for those in poverty, marketed to the middle classes = sign of people believing in very poor prospects for the middle classes.