The problem in terms of realism is that razing a city means killing the population, and giving an order to murder an entire city's worth of your own people is the kind of order that can result in the giver not being in charge anymore. I know there are historical examples to the contrary, but these are the exception rather than the rule, and usually involve internal ethnic conflict. Don't expect an "ethnic cleansing" option to be in a game like this.
In a game like Colonization, where the population is mobile, it's a different matter... you can just evacuate the people and goods ahead of the invasion (which felt oddly realistic). In that case an argument could be made for city self-destruction, because it was just the structures being put to the torch. But in terms of gameplay I think that takes too much of the fun and reward out of conquest, if all you can expect to conquer is a smoking ruin.