They have complied with the new Code of Practice and current Consumer Code for Home Builders by informing you of a material change and also before you exchanged contracts - which my advice is you should not now do.
You agreed to buy a three bedroom house at a certain price. Reducing the number of bedrooms greatly adversely reduces the value of the home and the re sale value.
So unless the price is substantially reduced to that of a 2 bedroom detached house, I would cancel your reservation.
You should get a full refund of your reservation fee although the builder can deduct reasonable admin costs, which he shouldn't morally do in the this case.
Walk away!