Turns out my problem was a setting on the server side, X11 forwarding seems to work just fine on wayland in Fedora 35.
The problematic line on the server side was in /etc/ssh/sshd_config
defautls to
X11UseLocalhost yes
changed this to
X11UseLocalhost no
And restarted sshd on the VM, X11 forwarding works as expected now.
Cheers,
Idunno