I see the problem of limited space that way:
It is unnatural that all buildings in different towns are NPC owned. There are really a lot of players. they have to sleep somewhere. Yeah, we don't sleep or eat, but it is about realism, well realism so that RPing different things has a purpose other than pretending.
Yeah, many player characters are journey-people, so they don't own a house they wouldn't sleep in most of the time anyway. They rather sleep in taverns or inns.
But there is only one tavern in whole Hydlaa for instance (with 3 rooms ;P). This would have to change.
As for player owner simple houses. Well, i don't care if i pass by NPC house or player house. They are all the same.
On topic of shops.
Well, i wouldn't panic there that we would have towns of shops. Because of a little detail: You have to pay taxes!
Now, would you pay taxes for a shop, which won't give you money, because owning is all you do about it 99% of the time? Ok, some people will, but this won't make towns of shops. In the end there will be as many shops as there are needed. There will be shops owned only by those dedicated enough to stay above.