Gov then there will be large market distortions.

Many people want to live in a house instead of an apartment but don't want to take the risk of owning.

Some people want to live in a part of town for 1 year before they commit to a 30 yr purchase and renting lets you do this.

If the house is sitting empty then it is reducing supply but if they are renting it out then the house is not reducing the supply.

More buyers in an area sends price signal that there need to be more units built in that area. Local gov and special interest groups conspire to limit new construction that would relieve the price pressure.

The conversation is the same as rent control. When rent control goes into effect owners take supply off the market - but when rent control is repealed supply doesn't immediately go on line. First, the prices rise to what their true value is. Then developers see opportunities to provide supply. But governments prevent them from increasing the supply.