> It’s a magical policy under that makes better off both the owner of a small house who needs a bigger house and the owner of a large house who needs a smaller house.

Because the person who needs a smaller house sells the bigger house immediately, the developer turns it into ten bigger houses (or condos), and that increases the supply of bigger units for the person who needs a bigger unit.

> If the owner of the large house would be better off by the presence of bids by developers, wouldn’t that tend (strongly) to work against the interests of the owner of the small house seeking a larger house?

The developer doesn't care about the size of the existing structure because they're going to knock it down and build a taller one, so then the smaller house increases in value by as much as the bigger one because a developer would pay that much more for that one too since what they really want is the land. In which case what happens is that the developer buys the smaller house and then that person has the extra money to outbid some other developer for the bigger house and they both win.

> It might work to help the owner of a small house who wants to move into a larger apartment or condominium.

It works even if they prefer a bigger house, because there are others who have no preference and only want a bigger space, and then some of the demand for larger units gets satisfied by the new condos and frees up houses to the people who specifically want a house.

Notice that if you're turning one house into 10 or 20 condos, the supply of houses is only going down by 1 but the unsatisfied demand for the remaining stock is going down by 10 or 20.