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I can definitely understand your concerns around this. The solution that has been suggested is not appropriate for an 8 year old boy, taking into account the location and the fact that it is a basement, secluded from the rest of the family. Taking him out of his room alone could give him the idea that he now comes second in his family' priorities. Giving him the basement as his room would give him the idea of being last in his parents' priorities and this could have serious effects on his self esteem and sense of identity feeling not being equal with the rest of the family. This can trigger siblings rivalry and create bad relationships between him and the newborn but also the rest of children who remain undisturbed.
I would definitely encourage you to talk to the parents and discuss other solutions for him. He cannot be allowed to feel secluded from the family. I do understand that the space is limited, but this should really had to be thought through before they decided to have other children. Practically this could be solved by perhaps allowing the 8 yr old boy to share a room with his sister so they both feel equally affected. The fact that the room may be too small has far less importance than him being on his own almost isolated. They could have bank beds to save space and redecorate the room in order for them to feel that this is a positive change for them too. Please feel free to share this post with the parents if you feel that this may be helpful. I can understand their pressure and I am sure that the thought has crossed their minds that this option is not suitable for their son. They may feel already guilty about this and this could explain their rather abrupt attitude towards you. However, even if they chose to ignore this now and proceed with their plans, it is most likely that they will have more problems in their hands to resolve later as the 8yr old may start displaying intense anxiety, fears and low self esteem.
Hope this helps and that your efforts have some effect.
All the best