Houses (the part through the door) are an instance. The rooms don't need to be under the yard, they can be anywhere or anything. Very much the same idea as a Tardis.

And while the idea of more space is worthy, when I moved into my Large, which has an object limit of 400 objects, I realised just how silly all the space was due to a shortage of slots to fill it.

I've now blocked off the basement and most of the top floor. My large is effectively just the ground floor and stairs.

So, anything that increases space must also come with an increase to objects - however, the PS4 is certainly holding everyone back there. Suggestions that inside a house could be set to no-PS4 users in exchange for extra objects have met with a lot of hostility.