Nevermind, I have resolved the issue.

In case anybody reads this wondering how I fixed it, the trick is to make sure that your actually AltContent panel doesn't have any set height, but instead set the contents to have a padding which allows the altcontent panel to be filled, thus making it so that when the altcontent panel has no content (such as in the admin controls) it also then has no height.

The necessary code looks like this:

.altcontent1 {
        overflow:hidden;
}

div.altcontent1 div.htmlmodule {
       height: whatever height you want
       padding: whatever padding you want (just make sure you put all size editing properties in this not in altcontent1)
}

Note: If you dont want the modulecontent header to have the same padding properties, use div.modulecontent instead of div.htmlmodule.

I hope somebody finds this useful.