Yeah, first of all, free houses is a major no. lynx_lupo is right, too many houses, and blatantly obvious abuse.
And second, ONE TOWN? That is just ridiculous and boring.
And I think the overpopulation system just fixes itself with the expansion of the servers, I mean that\'s why they shut them down so much, right? (grrrr X( ....) And I think that the dev\'s have some sort of weird intention of being able to get to the surface of the planet eventually. It\'s a little obvious, but you never know :]
Floating cities wouldn\'t be that unrealistic, but that is getting off topic. The airspace is limited, so probaly out of the question.
I have seen some pretty cool ideas for houses. Concerning the house you get, they will probably sprawl out of the city walls until there is a limit? That would be a little more realistic.