You guys are all too conservative.

If it were up to me, I'd scrap cottages altogether, or at least combine them with farms.
Think about it: towns represent urbanization. Besides towns the other major terraformation strategy is farming for supporting specialists. But specialitization is also a sign of urbanization and large population centers. And large population centers exist in fertile regions (ie with lots of farms). So towns and farms aren't opposite terraformation as Civ4 would have you think. They're the same thing. So why not something like:
Farm: +1 food
Village: +1 food, +1 commerce (grows from a farm in twenty turns)
Town: +1 food, +2 commerce (grows from a village in fourty turns)
Metropolis: +1 food, +3 commerce (grows from a town in 160 turns, gives a HUGE bonus for pillaging

)
+1 extra food with Sanitation
So farm -> metropolis would represent gradual population growth in FfH, as people repopulate the world after the ice age.
To replace the cottage as an improvement you can build in tiles without fresh water access, I'd make the pasture buidable in all tiles. They could start with +1 hammer, +1 commerce. and with techs (such as Horseback Riding

) produce up to +2 hammers, +2 commerce. Unlike farms they shouldn't grow to anything else though to represent the mobile life of animals herds, and the fact they can return quickly to a pillaged area (what's there to pillage after all?).
Unlike farms <-> towns, farms <-> pastures would actually represent a different lifestyle, one between sedentarism and nomadism.
By letting the farm -> town line end at a lower commerce level (only +2 - I assume metropoles would be rare) specialists would become more important as a means to gain gold and science. This will have the added advantage of a greater distinction between eg gold (merchant) and science (sage) civs depending on civics etc. Currently, due to the absence of a spending cap on science/gold à la Civ2, everyone sets their science spending as high as possible.
Idea: perhaps workers should be able to build towns directly at a cost of 70 turns after researching some tech. It would represent conscious colonization instead of natural growth, and would give workers something more to do besides idling half their time...
Non-XML ideas that would go well with this:
- Add spending caps for your commerce à la Civ2, changeable by civics. Eg standard it's maximum 60%. City States would give -10%, other civics could increase it.
- Decrease the increase of GPP. 150->100->50 per GP instead of 150->300->...