Yes, again, I agree with you that the landlords will have to reduce their prices because there will be a temporary housing glut. Although, they might just let them sit unused off the market until prices recover.

But the houses will get sold. There's a housing shortage everywhere.

Yes, in your scenario, assuming that all the houses must be sold and nobody is allowed to buy a second home (which would happen in the real world as the prices drop) and nobody becomes homeless (which would also happen), all those houses would go to previous renters. The remaining renters are those who are in the most financially weak situation - even as property prices drop and rental prices go up they still couldn't afford to buy before the market stabilized. In this market there is now going to be pressure driving down the prices of homes and driving up the price of rentals.