It is not that absurd, we have the same in The Netherlands (eigenwoningforfait). And yes, we also have the property interest deduction, we literally call it mortgage interest deduction (hypotheekrenteaftrek, HRA).
They reason this is done is because it allows tax systems to tax main residencies differently from regular real estate tax measures, which is usually in the wealth section of tax policy.
It stems from the 1890s in The Netherlands, I assume it'll be around the same era for Switzerland and Germany.
And for other readers, yes it is as terrible a tax policy as it sounds. It is highly regressive, favoring home owners over renters, and the more expensive your house the bigger the deduction. In The Netherlands the current election cycle has it as one of the subpoints of our housing crisis, and it seems the battle won't even be about if it should be abolished, but rather if the timeline should be 30, 15, or 8 years.
But... this is based on values of either in the 90s, or 70s.
I remember because the hypothetical income (on a yearly basis) for our 2016 new build was €1,200. Remember, income, not profit.
You couldn't rent a place within 5 miles that was below €1,000 per month.
In English this is called imputed rent, it's used in US for CPI calculations.
What makes this strange tax even more absurd: as you are your own landlord, your property interest rate becomes a business expense of your hypothetical rental company. So you can deduct your property interest from this income tax on the fictitious rent you pay yourself.
In effect, it is unattractive to fully repay your mortgage (you just leave enough debt to avoid the income tax), and Switzerland has the highest household debt in the world. By a large margin [0].
[0] https://en.wikipedia.org/wiki/List_of_countries_by_household...