People do care about community, including me. I hang out with my neighbors, and many times I have perused the houses in my housing area. It gives a sense of, "This is mine. I own this, nobody else does." It's something to be proud of and invest in. Instanced housing does not give that same feeling.

I would be okay with apartments being the instanced form of housing, especially if they made "suites" (small house sized), "lofts" (medium house sized), or "penthouse" (large sized). Obviously those names are not mandatory. Make those available to only player characters, and leave the houses to free companies. Increase the cap on apartments, and up the prices. I think that would solve a lot.