Lots of people buy vehicles that depreciate like mad because they believe the total value of the purchase exceeds the total cost.
I'm not necessarily saying that prices should have significant downward trajectory. Of course desirable locations will command a premium over time and so on. But as a society we probably shouldn't be excited that housing sometimes goes up substantially, even as the stock deteriorates.
> I'd be better off renting from someone else losing money.
No, you wouldn't, because if the rental market wouldn't support recovering the full costs to the owner, no one would bother owning land and renting it. Whatever costs fall on land owners will, inevitably, be fully (and then some, usually) distributed to renters of the land.
Only if the landlords are rational. If the landlord primarily bought the property hoping to sell it to a greater fool later on, then they won't care about the negative cash flow.
This is what's happening in Toronto right now. You can rent a condo for less than the mortgage interest + property tax + condo fees + maintenance.
Land already does depreciate to a degree, because most places levy property taxes on land. People don't realize capital losses when they sell because the paper value of the land likely increased. But it's completely possible to experience a net-loss holding land over a long-term, even if it is sold for a profit.
Maybe if housing/land didn't appreciate over time then investment dollars would stop chasing it, and the overall price of renting would stay flat or decline due to the lack of capital inflow to the underlying asset. Who can say?
The problem with these thought experiments is you have to assume some reason why housing prices have stopped increasing, but also that nothing else about the economy has changed. Otherwise the thing that stopped housing prices increasing has probably also had some other pretty serious effects on the economy.
It's like asking "what if World War 2 never happened"? Well, why didn't it happen? The same forces would have pushed us in the same directions. If it didn't happen, well, that world doesn't look very much like the one we live in, so who can really say what would have happened?
In general, making as tiny a change as possible, housing still would be priced the same as it is now - i.e. based on what the market will bear, rather than some weird idea that landlords would get vindictive and crank rents just because their asset is no longer appreciating. To the extent possible that's what they already do, and they would price themselves out of the market with further increases.
But if landlording is still a revenue-positive activity, then people will do it, and housing prices would continue to increase in anticipation of future gains. People would still want to move to desirable locations like big cities, and that increases housing prices too.
So I don't see how exactly this happens without a major, major shift in the housing market - something like "landlording is a revenue-negative activity" or "there is a significant chance of losing your asset value in a fashion that it will definitely never recover within the span of several generations". i.e. nothing like the world we live in.
It's a complex system. One can identify the immediate consequences of a change, but they certainly work more like some "pressure", where other factors will also change and apply their "pressure" on dissimilar ways.
Reducing the lucrativity of owning a house will put pressure into less housing stock and higher rent prices. If it is a fast change the rent price will almost certainly not keep up with it, because the housing stock is kind of fixed at the short term. And yes, some unrelated action may overwhelm that factor. Some unforeseen consequence may also do that, but this one is much less likely.
I'd be better off renting from someone else losing money.