Sheep is an important producing animal in subtropical and arid regions; however, sheep farming practices and welfare standards are still not well established. To move to either intensive or intensive sheep production, stocking density (animal/area, SD) is a significant factor that influencing the welfare and productivity of animals. However, there are discrepancies in space allowance standards for wool, meat, and dairy sheep at different stages. Thus, this review article sheds light on (1) the geographical distribution of wool, meat-type, and dairy sheep populations; (2) the effects of interaction among space allowances, housing systems, and group size on the social, feeding, and aggressive behaviors and human-sheep contact; (3) the effects of space allowance on wool, growth performance, and milk production of sheep; (4) the relationship between space allowance and reproductive performance; (5) the effects of stocking rate on immunity; and (6) suggestions to mitigate the stress and deleterious influences of SD on the productivity of sheep. In conclusion, the larger space allowance with access to an outdoor yard can improve social and feeding behaviors, meat and milk yield, and wool quality. Moreover, ewes are more sensitive to SD, so they should receive an adequate space allowance at each stage. The changes in behavioral responses of each sheep breed refer to their different requirements. Therefore, there is a need to determine the impact of housing aspects, especially space allowance and enrichment tools on the productive performance and welfare indices of sheep for implementing welfare-economic standards for sheep production.