Indeed, wages that go up increase fulfillment, all else being equal, but housing costs that go up increase civil unrest. It is not good for housing prices to increase unnecessarily.
Perhaps your discomfort is cognitive dissonance? If so, bravo. There are a lot about economics that defy common notions of decency, and you have to push through it to make decisions that bring actual long-term benefits. Human cognition is defective that way, but our remarkable intellect allows us to understand the bigger picture.
Some basic math on the author's numbers also reveal that the laws have compelling impacts on his bottom line for rental income - mainly in the downward direction.
Plus, looking at the floorplan of the proposed apartment: what on earth are people in one of these microhousing blocks going to do if there's a fire?!
After a cup of tea, here's my conclusion: this is the housing equivalent of saying we must lower the minimum wage, otherwise employers will create fewer jobs.
It might be correct in a very narrow sense. It still doesn't feel right to me.