Habitat forming ‘ecosystem engineers’ such as kelp species create complex habitats that support biodiverse and productive communities. Studies of the resilience and stability of ecosystem engineers have typically focussed on the role of external factors such as disturbance. However, their population dynamics are also likely to be influenced by internal processes, such that the environmental modifications caused by engineer species feedback to affect their own demography (e.g. recruitment, survivorship). In numerous regions globally, kelp forests are declining and experiencing reductions in patch size and kelp density. To explore how resilience and stability of kelp habitats is influenced by this habitat degradation, we created an array of patch reefs of various sizes and supporting adult Ecklonia radiata kelp transplanted at different densities. This enabled testing of how sub-canopy abiotic conditions change with reductions in patch size and adult kelp density, and how this influenced demographic processes of microscopic and macroscopic juvenile kelp. We found that ecosystem engineering by adult E. radiata modified the environment to reduce sub-canopy water flow, sedimentation, and irradiance. However, the capacity of adult kelp canopy to engineer abiotic change was dependent on patch size, and to a lesser extent, kelp density. Reductions in patch size and kelp density also impaired the recruitment, growth and survivorship of microscopic and macroscopic juvenile E. radiata, and even after the provisioning of established juveniles, demographic processes were impaired in the absence of sufficient adult kelp. These results are consistent with the hypothesis that ecosystem engineering by adult E. radiata facilitates development of juvenile conspecifics. Habitat degradation seems to impair the ability of E. radiata to engineer abiotic change, causing breakdown of positive intraspecific feedback and collapse of demographic functions, and overall, leading to reductions in ecosystem stability and resilience well before local extirpation.