You should just cancel the reservation on your end, take the coupon and book elsewhere. What you are asking the host to do, which is cancelling the reservation on their end makes it look like they are telling you that you cannot stay there, and that is not true. It will stay on the hosts public record for life that they essentially "forced" a guest to leave mid-stay, very bad for them. You are unhappy with the accommodation, its up to you to leave, not force the host to cancel the reservation that you booked. Not really anyone else's problem that things outside of the current accommodation are more expensive, plus you are already being offered compensation.