Transitional housing programs aim to improve living skills and housing stability for tenuously housed patients with mental illness. 113 consecutive Transitional Housing Team (THT) patients were matched to 139 controls on diagnosis, time of presentation, gender and prior psychiatric hospitalisation and compared using a difference-in-difference analysis for illness acuity and service use outcomes measured 1 year before and after THT entry/exit. There was a statistically significant difference-in-difference favouring THT participants for bed days (mean difference in difference -20.76 days, SE 9.59, p = 0.031) and living conditions (HoNOS Q11 mean difference in difference -0.93, SE 0.23, p < 0.001). THT cost less per participant (I$14,024) than the bed-days averted (I$17,348). The findings of reductions in bed days and improved living conditions suggest that transitional housing programs can have a significant positive impact for tenuously housed patients with high inpatient service usage, as well as saving costs for mental health services.