Duh. Need to quote this because it's multiline

tasks/virt_instance_create.yml

@@ -56,7 +56,7 @@
   when: inventory_hostname not in result.list_vms
 
 - name: add new ssh host key (you still need to add it to official ssh_host_keys later)
-  local_action: known_hosts path={{item}} key={{ hostkey.stdout|string }} host={{ inventory_hostname }} state=present
+  local_action: known_hosts path={{item}} key="{{ hostkey.stdout }}" host={{ inventory_hostname }} state=present
   ignore_errors: True
   with_items:
   - /root/.ssh/known_hosts