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As Covid-19 highlights more than adequately!
Yo you live in Essex ? :) long live Libre Boot
In the time frame of this game? It's because people live in cities for safety. More people = more safety, big city = prosperous city with lots of opportunities, usually part of a big powerful empire for extra protection. But all those people in one place also = lots of poop, poverty and disease. Lots of poop, poverty and disease = unhappy people.
Bro, go live in one of the poor sections of a large city in 200 BC. Spend a week eating their food, pooping where they poop, living as they live, then come back and tell me how squalor ain't no thang.
So you go into the city details page where you're hit full on with all these stats, but you push on though until you stumble upon the huge Squalor penalty.
At that point they're like "WTF is Squalor!? Ya bastard, ♥♥♥♥ is unreal, the ♥♥♥♥ ama supposed to deal with this absolute ♥♥♥♥♥♥♥?" (or whatever kids say these days) so they go to the Forums to voice their displeasure. Sometimes they get helpful advice, the rest of the time they get shat upon. When did the Total War community get to be so wretched...
Because it is tedious process that always ends up with you demolishing military builidings, let city rebel, besiege it and exterminate populace. Rince repeat.
Historically accurate? :D
Talking about original which I never played much (played only BI) because of this "feature"; I can only hope this was changed with remastered.
This is one reason why, at least back in the day, people often never built farm upgrades, except perhaps the initial Land Clearance version. Anything that added to population growth would, ultimately, add to out of control squalor. The faster the growth (i.e. due to more farms) the quicker you would run into this bottleneck. It can get particularly annoying if you're in a war and short on cash with a bunch of towns ready to upgrade. Without upgrading the government building the squalor situation gets worse and harder to deal with.
I never really found it to be to difficult to manage, at least once I got the hang of the game. I do however wish some of the things you could build, like Sewers, would really, you know, actually combat squalor by removing some of the penalties. This is after all what one might expect following the installation of sanitation utilities (even in that era). People wouldn't just be happy about new infrastructure, they'd be glad they're not living in their own filth quite to the same degree as well.
In the original game, Squalor was uncapped, just got higher and higher the more population you had, and it was possible to get a city that was impossible to keep from rebelling.