Have to agree with you on this one. I might not go as far as a diesel supermini, when you can get a full-sized diesel for so little these days, though.
Good call on the house, though - it sounds like a fairly pikey area where he currently lives, but it has to be worth a reasonable amount.
I looked at prices around where my mum and brother live a couple of weeks ago, 'cos my mum was kind of thinking about downsizing - a 1930s built 3-bed semi with garage and drive big enough for 3 cars comes in at around £130k - and that's only a few miles from where he lives.
Flog the LS, buy a 500 quid oil burner, put the grand or so towards a house moving fund.