First, we genuinely don't know how substantially this will alter the market. Your assumption seems to ignore the fact that there will be a massive explosion of demand as well. You seem solely focused on the fact supply will go up, no that consumer base will too. You're absolutely flat out wrong to think prices will dip FAR below vendor prices. Any crafter worth their salt wouldn't make things that don't have profit margins and supply will dwindle. I'm unsure who exactly you think would start actively producing things to sell at a net loss, nor why you think there would be a demand for something as trivially inexpensive that vendors sell it. The vast majority of the market is based around things explicitly vendors don't sell.
Second, if deflation happens, it is a GOOD thing for those without crafting. If by your assumption prices deflate massively, the only ones benefiting this are the consumer, which majority being non crafters. Competition can only be good for the consumer as well, deflation or not. Prices will be far more stable as supply grows and you're more likely to see prices fluctuate less and the often 10-20%+ you can already see.
Third, the price of houses are static. The income of gil for the average player outside the market board is surprisingly a lot more than most would assume. Even if you strip the market board completely out of the equation, because of this base income it will never be out of reach given prices have static costs. If you were to make the argument that housing has issues based on availability, I don't think anyone would disagree but that's a wholly separate issue disconnected from the marketboard price shift.
Do I think this will cause issues in the short term? Sure, throwing flood gates open too massive amounts of new competition as well as consumers will assuredly make things fluctuate. Do I think this will be a good thing in the long term? Sure as hell do. Prices will even out, accessibility for consumers will go through the roof, and throughput of sales will pick up.
I'm not entirely sure who you're exactly worried about. Are you worried people on low population servers won't be able to sell a single item at massively inflated prices anymore? Are you afraid large population servers won't be able to deal with the influx of competition? For complete reference, this is coming from a rather hefty crafter on Greg with one of the more cutthroat markets out there, and I can hardly see this making much of a shift in our prices and people already make plenty of profit here. If you're worried about lower population servers not being able to bankroll themselves on inflated prices off just a single item, I'm hard pressed to believe that they can't do that still even with Greg level prices or lower.