Honestly, I think that for the overwhelming majority of people, these tax issues are way over their heads. (I have no confidence that I understand them myself. In finance, reliable and accessible information is very hard to find.) So I think that such considerations, while not completely irrelevant, are easily trumped by the combination of peer pressure, deeply ingrained but obsolete folk wisdom, the sheer emotional appeal of home ownership, the intuitively appealing but fallacious view that renting means giving away money while paying a mortgage means saving it, and the irrational optimism about future trends in house prices (which has abated in recent years in the U.S. but is still rampant in Canada).

On the other hand, the counterargument about asset diversification seems to me unassailable. Putting all your eggs into one basket is correctly considered as a crazy financial strategy, and a fortiori, putting a bunch of borrowed eggs along with them is crazier still. Yet houses are somehow considered an exception.

[Edit to add: Looking at this a bit more, I realize I didn't even know there was such a straightforward tax deduction for mortgage interest in the U.S. However, this only strengthens my point, since no such thing exists in Canada, but people still think and act the same way.]