In a way I agree with you that this will cause market distortion in the form of greater demand for real estate over eg. equities. But there are plenty of such tax distortions; for example many countries have favourable tax treatment for domestic dividends.

Regardless, I assume the logic behind this exception is that while you can easily sell a portion of your holdings of publicly traded stocks to cover your annual tax burden, you can't sell a portion of a house. You could of course finance, but that's going to disproportionately benefit lenders.