The AirBnB market is much more profitable than rentals, so all investment is going there and many flats are even being converted. By incentivising AirBnB, you're driving the supply of flats down as they are converted and the all the new supply that is created goes straight to AirBnB.
The theoretical point of oversaturation when AirBnB supply starts leaking back into long-term rentals would only happen if the number of investors was infinite and prices were set by a perfect inverse relationship to supply. In reality, neither of those assumptions hold. Investors are finite and their number decreases with profitability, which is inversely proportional to supply, so it's unlikely they'd ever reach oversaturation. And AirBnB prices don't decrease linearly with supply, most people just look at what they'd make with long-term tenants and set their price so they end up with some margin more than that...
For a (slightly gruesome) analogy: You have a leech. You want the leech to drink even more blood, until it finally fills up and your circulation reaches an equilibrium. Until that happens, you're bleeding out and you probably won't survive. Why not just cut the leech off?