The problem is, if you take realistic amounts of humans, you either get a dia show, or they all look like triangles, especially with the hardware available at the time Morrowind was released.
Also keep in mind that to make it realistic, you'd need more houses, people wpould complain about having to walk half an hour through that imperial city just to get to the next point of a quest etc.
Plus, most people just don't seem to care a whole lot the way it is now.