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Instanced housing can work if done propperly. EQ2's problem is that the instance door is literaly a room door. inside that one door is 50 people's one room shanty hut.

In phantasy start universe there is instanced housing, but rather than going to a single door that everyone uses, you go to the main elevator/door thing to a huge housing complex. ie you go to the entrance to the massive housing sector of the space station and then get wisked to instance. it's a tad more immersive than every troll living in the same one bedroom shanty.