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Is it possible for the local villagers to build their own structures or do I need to do that for them? Also what are the city "limits" so that I can make sure my population grows while they still want to be in those houses.

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As far as I know, villagers currently will not build new homes for themselves, so you would have to do that for them. According to the Minecraft Wiki, the radius of the boundary is independent from the number of villagers, and is rather defined by the most distant active door (house) from the village center. It also says that the game will check for new houses that you may have built as villagers walk around, meaning that you could potentially expand a village indefinitely.

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What defines the city center? –  Young Guilo Apr 8 '13 at 3:57
    
Read the article linked above. It includes this information. –  mrfishie Apr 8 '13 at 4:00

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