I think that once interest on other consumer debt (student loan, or even some other loans) was also tax deductible, but were taken away (don’t remember when). So relatively speaking, mortgage debt became more attractive to other consumer debt. Also, the capital gain tax was introduced in 1995 or 1996, I believe. Before that, you have to “roll” your gain into another house. So again, relatitively speaking, the added flexibility makes a house more attractive as …. an investment. So over the years, house became an asset class of its own as far as tax is concerned.

As far as prop 13 is concerned, the result is cumulative. That is, if you bought a house 10 years ago and had a very low tax base, you’ll want to keep it, or to give it to your children. So that might have reduced housing turnover in CA and pushed up the marginal costs for new buyers.

Note that I’m not arguing for a “permanent” high price point because of all these. In fact, I think that these favorable factors couraged more speculative buys in California, therefore making the size of the bubble bigger. How it’ll deflate depends on interest rate, credit availability and employment….