"Those who want to distinguish themselves from the masses - who want to consume conspiciously - will also be affected, since they will have to spend less to stand out from the crowd" - maybe I've misunderstood this, but surely it would have the opposite result? Let's say rents are ~$20/sqm (adjust for your own city; the principle stays the same). If I want my apartment to be 50 sqm rather than 40 sqm, that's an extra $200. But if 40 sqm apartments were free, the price difference would be the full $1000/month price of the bigger apartment. You've still got a cliff, just like in the means-tested welfare case; it's just that now it's on the consumption side.

In practice this would probably destroy the market for mid-priced goods - who wants to pay $1000/month just for an extra 10 square meters? Non-subsidized goods will only start being attractive when they get much better than the stuff the government provides, not just slightly better.

Also, if you give out goods rather than money, you're going to have to provide a huge range of different goods/services, because otherwise there will be whole categories of products that people who legitimately can't work (elderly, disabled etc) won't have access to. And if you do that, the efficiency of your economy is going to go way down - not just because the government is generally less efficient than the free market, but also because people can't use money to allocate resources according to their own preferences.