For the players, "owning" a part of it strengthens their bond with the game world, and is wildly popular where available. UO devs didn't anticipate just how strong this psychoogical effect is (and neither do you, it seems), which led to there being not really enough space on the game world, and to overpopulation/over-urbanisation. By the time of SWG (which had the same lead designer - Raph Koster) rolled out, this problem was solved. Even in Minecraft, people are fiercely territorial about "their" piece of land.
For the game company, this means people are likely to stick around longer, which translates to higher profits. Also, items for the house builders and decorators - new colours, patterns, items to decorate the house with - are easier to introduce, since they don't affect game balance, and can be more easily monetised via a microtransaction shop.
But
-if they put in an instanced player house area, people will complain that the houses aren't part of the normal game world
-If they put in non-instanced player housing, people will complain that the houses are going to take up to much space
-If they limit the space that player housing can be put on, people will complain that only the old-guard or richest people can have houses
-If they dont put in player housing people will complain about having no player housing
It's a lose lose lose lose situation