It's a weird thing to grapple with, but trying to make a completely realistic city, aside from requiring a monumental effort, has its own problems in terms making a game enjoyable. Even if you put a lot of effort into the detail of the houses and their inhabitants, each one you add is only there to serve an illusion, it's not as if all of them are important to the story. Each house that has a cupboard with some treasure makes every other house with a different treasure cupboard just a little bit less meaningful and worthwhile, since the value of any found treasure is tied to its rarity. That leaves you either going through a bunch empty houses or acquiring a bunch of worthless treasure, both of which suck.
Which isn't to diminish the original point of the op that disappointingly small cities harm the enjoyment of the player. Watching a grand cutscene before entering the capital city of an empire loses its charm when you find out there are 16 people living there. Devs need to strike the right balance, and that usually means including more than they tend to and not less, but it isn't recreating a 1:1 city, almost none of which has anything to do with you. A significant number of meaningful experiences, like interesting npcs and varied quests, alongside art that somehow gives an impression there are a lot more people and places in the city but they just aren't connected to what you're doing, is probably the best use of resources. That way more time and effort can be put into enemies, the combat system, other cities, the rest of the world, etc.
As for Rabanastre, I think it used a rail system to give the impression you were traveling through neighbourhoods to other districts, right? Not bad for the PS2's capabilities I guess.