For the most extreme example just look at San Francisco here in the US, where the average number of legally-allowed new housing units is currently around 3.5 total per month (https://sfstandard.com/2024/04/08/san-francisco-new-housing-...) in a city of 873,000 people.

Cities typically don’t have draconian taxes on real estate.

~0.1% of real estate. If the major concern is these rules change nothing then that applies to both upsides and downsides.

No the issue with activities that constrain supply is that they might constrain more supply than the explicit units impacted by the policy.

This very slightly constrains demand not supply.

At most the knock on effects might impacts supply, but that’s up to the market to decide.

The impact on the market is precisely the concern. I’ve not seen any studies that show how taxing market participants differently impacts the supply in real estate. So I don’t have strong convictions one way or the other. But you can craft a narrative that foreign buyers are higher margin customers so drive builders to create at higher then their participation rate.

But more generally if you want more of something, generally I’m suspicious of efforts that make that thing more expensive.

You’re simply ignoring scale here.

Having what in practice is probably 1 in ~5,000 fewer customers has negligible impact on a housing market. That’s assuming many foreigners who would be buying a 3rd home will probably substitute longer term rentals but it’s not zero and from the perspective of customers any movement is positive here.