Why does Charlotte live in a "small" house?
TL;DR Her choice of house reflects her character.
Charlotte comes from a humble background and is determined to instill strong values in her children, shielding them from the distorted values of those around them.
In this context, "small" is relative. The house is still large and located in an exclusive area, but it is modest by comparison. This is later emphasized through a deliberate contrast with the house of Emma's friend, Jenny, who lives in a far grander mansion. However, Jenny's home is empty of her parents and their love, leaving her vulnerable to the allure of the party lifestyle.
In contrast, Emma, guided by Charlotte's influence, resists this path and ultimately avoids falling victim to Zak in the way Jenny does.
Rather than owning a huge mansion as an ostentatious display of her wealth, Charlotte has built a home filled with love and warmth. This choice, which goes against expectations, reflects her character.