I want to make a distinction between productive use of capital and rent-seeking. If you're getting a loan in order to buy an existing piece of property and rent it out - that is not productive, it is rent seeking (since you generate cash flow from just holding onto an asset and not doing anything with it).
If you're building a new house or renovating/repairing the existing house with that loan, then the part that goes towards building/renovation is productive and the interest on that part of the loan should be deductible.
The point is that people can make a lot of money by buying up real estate "portfolios" and simply sitting on them to generate cashflow, pricing others who want to buy a home out of the market. This would even out the balance a bit and make holding onto lots of investment assets more expensive but buying your first home [relatively] more affordable.
Why should airlines or manufacturers or other businesses be able to deduct the interest on their loans, while one specific sector cannot?