I don't know if this is the real historical reason, but if you're doing something 2.5D, isometric, at with 2D graphics, at anything other than a 45 degree angle, then anything larger than one square creates clipping problems because part of it should either be behind another sprite on a square whose closest vertex is closer to the camera than the furthest vertex of the forward element. Z-ordering things on the ground between those elements gets even trickier. Making each building (or part of a building) stay within one square is by far the easiest way out of that predicament.