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And yes, citizens don't seem to mind to live in a -20 health -20 enviroment hellhole.
Well, if you research them and hover over the icon in the science result screen it says 'Strenghtens industry'. If built, buildings start to expand into their next 'tier'. However, i don't know if that results in an actual plus in income in the long term.
Yeah, you need cobblestone then asphalt if you move density in those areas up (Which I'm not sure if that's worth doing). They still make bank then.
There's a bit of a sticky traffic point where cobble is your max level and chokes industry until trams (which requires electricity and is hella expensive) or asphalt.
Also, I've just strted a new game following a method similar to yours, just districts and services only. No infrastructure and no density upgrades in era 1 and the city is much larger and more fiscally sound than my previous attempt.
Finally, don't neglect your commerical area's. They provide not only jobs and income, but some of the services residents require too.