Translation:When we were buying the house, it looked much bigger.
nearly nobody would say it like that (using progressive) in English, because the first part of the sentence gives a point in time (then/at that time, when we bought the house). The situation would be different if the complete sentence would be something like "when we were buying the house (= when we in the process of buying / just about to buy), suddenly a thunderstorm came up and removed the roof".
The English sentence sounds fine to me as well, and it corresponds nicely with the verb used in the Czech original.
I interpret "buying the house" as a process that starts with finding an interesting property and (usually) ends with signing a purchase contract and, if all goes well, later being handed the keys. Yes, every step along the way may occur at a single point in time, but ultimately each of those points joins the others to make "buying the house" something that happens over a period of time.
When we bought the house, it looked much bigger would refer to a point in time and the Czech sentence would begin Když jsme koupili.... Note that your "nearly nobodies" might be showing up in this thread to comment about whether buying a house may be a process or it must be a moment of transaction.
That is too simplistic. While the concepts of expressing the aspect of actions are similar in Czech (perfective versus imperfective) and in English (simple tenses versus continuous tenses), they are far from being the same. In most cases your equation will work, but in many it won't.
It doesn't work for iterative actions, it doesn't work for verbs of the senses (see, hear, smell, feel, taste). And, in my opinion, it doesn't work for the given sentence. Here "kupovali jsme" should be translated as "we bought".
I wanted to report the "When we bought this house...." answer, but I won't, since "kupovat" is the imperfect form of the verb so yes, it would require the past tense continuous (to keep with the meaning). On the other hand it's a very awkward example, it transmits the idea that the purchase of this particular house was a long winded process during which we kept having the idea that it is much bigger than it actually is. Basically, it makes me feel like we started to buy it today, we finished the purchase in x amount of time, during which it looked bigger and at the end of which it suddenly "shrunk". TL;DR: it seems more like a "trap" question and less than an actual example meant to ensure a student's progression.
I'm going to stick my two pennorth in to this one as I have in several other exercises in this section already. It seems to me that there are a number of verbs and situations where English speakers optionally use a perfective past when in fact talking about what Czech considers an ongoing/continuous event, and I will just have to get used to it. Personally, if making the above statement I would have said "When we bought the house it looked much bigger", but like Mark841597 I will be a good boy to keep the peace and stick to the literal translations.