I would love to see a separate 700 item limit for each area of hall of the lunar champion as well, but it is my understanding that, because the areas aren't actually instanced from each other, that wouldn't be possible without sacrificing the performance of low-end systems.
If my understanding is correct, I would personally prefer to have a load screen between each area of halls, thus allowing each area to be a separate instance with a separate limit. Just my personal preference.
You are right. Due to a bug in the Psijic Villa, I noticed that the two areas, ouside and interior are not separate instances, but when you use the door, you teleport to another area. Actually, the cathedral interior is under the outdoor area. I will later update with a screenshot.
They will most likely never increase the item cap. Housing is time consuming, very expensive and also frustrating for any average player. So, it only appeals to a very small portion of the veteran players. If you are new to the game, you can't hope to fully decorate a 700 slots mansion, unless you open the wallet and buy from the crown store. So the vast majority of housing enthusiasts are veteran players who gathered a lot of resources, and also finished most of the content in the game.
Update: Here is how you can see that the interior is actually under the outdoor area. The crystals are inside the cathedral, but somehow, because of how water works or a bug, you can see the crystals through the water. Both areas are in fact part of the same instance.
It should have counted as separate houses for each wing. We have no problems with owning many different houses and using the limits in those. It was pretty cheap to have each doorway literally teleport to another location and not count that as a whole new house with a whole new limit. Could've made something spectacular that way.