let me explain everything:
1)in normal ballon mode luffy pumps his lungs(and possibly his stomach as well) by breathing alot of air into them.
when he is at gear 3 the air is not going into the lungs, but into the bones that are around the lungs, therefore, he becomes hard and losses the robber reflecting abillity.
2)the steam and the heat are side affects created by g2. g2 is pumping alot of air into the blood stream and making it run waaaay faster, because of that the body is getting heated up drasticlly(think about what are you doing when you are cold. you use diffrent ways to make the blood stream run faster so you would get warmer). the steam is a side affect of the heat, because the heat is so sudden luffy gets much hotter then the air around him, therefore, steam is created(when you breath hot air out in the winter there is also steam. when people are very sick and hot, if they will go out in the winter without proper clothes there will be steam as well).
i hope everything is clear to you now ^^
and plus the ballon doesnt shrink you to the size of a kid as a side effect either but wat kinda of weird side effect is that