I am not sure if you can "rule investments by fiat" like this. People invest in housing because they distrust investment in businesses, or at least expect smaller returns. That has some underlying cause.
If you ban investment into housing, it does not follow that people will start trusting businesses more and give them their money. I would rather expect the money to find some hitherto unexpected side channel elsewhere.
If, on the other hand, housing ceases to be a good investment because of a glut of housing, people will start investing into something else even without legal pressure to do so.
What almost the entire West has is artificial scarcity of housing, because of overregulation weaponized by NIMBYs. Artificial scarcity can be remedied, though, just like they did in LA.
"It seems obvious that people would just put their money in the stock market or bonds like they do already."
Not obvious to me, but a lot would depend on the details.
The GP wishes for a law(?) that would ban investing into homes, but how do you even do that? As long as new construction is capital-extensive (and it won't stop) and at the same time subject to artificial scarcity by incessant vetoing of higher density developments, every sqm of living space in desirable places will generate huge returns to someone. So the loose capital will look for ways how to soak into mortar and bricks again, only perhaps more convoluted ways instead of directly.
The only way to break this combination is to remove the artificial scarcity, at which moment the entire field becomes a lot more competitive, and in competitive fields, prices generally sink.
If you ban investment into housing, it does not follow that people will start trusting businesses more and give them their money. I would rather expect the money to find some hitherto unexpected side channel elsewhere.
If, on the other hand, housing ceases to be a good investment because of a glut of housing, people will start investing into something else even without legal pressure to do so.
What almost the entire West has is artificial scarcity of housing, because of overregulation weaponized by NIMBYs. Artificial scarcity can be remedied, though, just like they did in LA.