Originally Posted by dangolegators
This is nonsense. You yourself said 'Lower interest leads to higher purchase price and same net payment.'. With the same net payment, there is little or no change in the incentive to buy a house that the mortgage deduction provides. You are claiming that in times of low interest rates, the mortgage deduction 'accelerates' the market. I'd say the exact opposite. The lower the interest rate, the less the incentive is to take advantage of the mortgage interest deduction.
Yes that's true if people are making the same net payments on traditional mortgages during the period of asset inflation, but in fact they begin speculating on appreciating assets by taking on more leverage either via higher payment, ARMs with teasers, or interest only loans. In that environment the mortgage deduction is subsidizing a cycle of appreciation and speculation by reducing its cost and increasing the palatability of these novel financing instruments. When no cycle of appreciation and speculation exists the effects are as you describe, and novel financing instruments hardly exist.