I personally feel it is rude for other people (even if they are family! OR very good friends!) to comment on the size of a person's home. It may be by choice that they live in a small space or it may be for financial reasons; either way it is not up for discussion *unless* that person brings the subject up first. If they say, "I do wish I could afford to live somewhere with more space...." then it's fine for me to sympathise with them, otherwise I would consider it a no no.
Either way, they should be more observant and notice that there is not a lot of spare room, and if they want to spoil your daughter, they can do it just as well by giving a donation to a savings account, or by buying vouchers for a day out
(even at one year old, a zoo or similar is fun) or other non-stuff gifts.
My DD and SIL with a three year old live in a more spacious house than we do, and has about two thirds of her toys packed up in her attic. Once a month or so, when grand-daughter is asleep, she takes up some toys and brings others down, so it is like Christmas for her with lots of 'new' toys to play with. Any toys that are still ignored after two or three circuits are re-homed.
As far as her clothes are concerned, she passes on things as soon as they are grown out of, or if none of them like a gifted item even if it fits, and too-big clothes are all sorted into growing-into boxes, in sizes.
So only things that are used and enjoyed remain in the living room or her bedroom. Don't know where my daughter got her tidy, organised genes from - not me or her father, that's for sure.
