patrick.net

All things being equal, the mortgage deduction would certainly be a factor in the rent/buy calculation.

But, as has been eloquently pointed out many times on this and other fora, all things are currently NOT equal.

I think the mortgage deduction for OO's in the US plays the same part as the building depreciation allowance for RE investors in Australia. It is a selling point for the Realtor (tm) to trot out.

For any newcomers, you can use this spreadsheet model I created with the help of lots of smart folks from this blog. It'll show you exactly what the tax-deduction is worth to you financially.

Bottom line is the tax deduction is powerful, and good, but it doesn't overcome dramatically overpriced houses.

Investors in Oz get numerous tax breaks, and nothing much on owner-occupying, so the position is more or less reversed from the US one. However, we are seeing similar rates of investment purchasing, e.g. 40% of new mortgages have been for an investment property in both countries in recent times (altho that could be changing as the bubble bursts and ROI diminishes, which even the dummies who just attended a RE seminar can now see).

There's no Prop 13 in other bubble centres, both nationally and internationally, e.g. NYC and DC.

This might mean that other factors are equally to blame -- historically low interest rates, a shaky sharemarket post-Enron, WorldCom and dotcom, and much more liberal lending products from the banks, with a transformed 'acceptable risk' profile. (We are now beginning to see the fallout from the new acceptable risk products from the banks...)

Sharemarkets are recovering and confidence in stocks is increasing. Property ROI is mined out for another 10 years. The Juglar business cycle is turning another notch...

The psychological perception of tax benefit is just too powerful.

These two statements are the same. But they will be perceived very differently:

1. Not paying mortgage interest and not having to deduct tax.
1. Not paying mortgage interest and missing out on deducting tax.

House prices are higher in blue states than in red states.
So, the power of the mortgage deduction is higher in the blue states.
In a sense, where the mortgage deduction mitigates a blue stater's housing cost, it is a kind of a subsidy from the red state folks.

A cap on the mortgage deduction would be more fair to the red state people. But since the Republicans who pander to people in the red states are wealthy elites, they wouldn't dare stoke a fire of resentment in their home turf. So we in the blue states benefit in a trickle down effect.