Coral reef ecosystems are experiencing a global decline in coral cover, with direct effects on reef fishes. A decline in habitat may lead to crowding of live coral specialists into remnant habitat patches, intensifying intraspecific competition. Increased local densities of conspecifics are known to negatively affect key demographic processes, but the magnitude of density effects and the role of crowding in response to habitat loss are poorly understood. In this study we examined habitat use and relationships between habitat availability and population density in a coral-dwelling damselfish — Chrysiptera parasema. First, we conducted habitat use and availability surveys to establish the level of habitat selectivity. We then investigated the evidence for crowding due to habitat loss by comparing densities within juvenile aggregations on natural reefs with high and low cover of the preferred habitat. Finally, we used a manipulative patch-reef experiment to measure the potential effects of crowding on mortality of juvenile C. parasema. Surveys revealed that 97% of juvenile C. parasema were associated with Acropora corals. Furthermore, C. parasema densities were closely related to the cover of bottlebrush Acropora, the preferred growth form. Contrary to predictions, there was no evidence of crowding on natural reefs with low coral cover, but rather, reefs with abundant Acropora cover supported larger aggregations with double the density of juveniles. We hypothesized that low densities of C. parasema on natural reefs with low coral cover could be explained by intense intraspecific competition. Experimental manipulations showed that juvenile mortality was density-dependent, with mortality 20% higher on high-density experimental patch-reefs compared to low-density reefs. Behavioural observations on the patch-reefs revealed that the frequency of agonistic interactions and distance to shelter were both unrelated to conspecific densities, highlighting the need for further research into mechanisms underpinning density dependent mortality. These results suggest that intraspecific competition may play an important role in reducing reef fish abundance as a consequence of habitat loss. Given that coral reef systems are currently under threat, with a global decline in coral cover, this study adds to the growing body of knowledge of how disturbances to habitat may affect reef fish communities.