Your house your rules but it's Shel's house too - that's a dilly of a pickle hey.

Do you really think that it's immoral? Or is it just because it's your niece and it's hard to think of your little niece being sexual? If it was my niece would you think it was wrong?
What would happen to your relationship with your niece if you were to tell her to sleep in a differant room? Are you prepared to risk a big teenage tanty if you put your foot down? Will it erode her trust in you?