The plot (The Old City: Leviathan)

Actually, I just finished the game, and of course, there are many questions left. Let's figure out the plot together.
So, initially, literally after the first 10-15 minutes of the game, I thought that the hero was at the reception of a psychotherapist and dealt with his problems, especially in a location where two people sit opposite each other, and then the main character shouts to be released , they say, climbed too deep, hard. This is my first concept of understanding.
Further, it seemed to me that the old city is a very real place, people started to have galyones because of the poisoned water and everyone went crazy. Then I changed my mind, since many bodies of soldiers from the Second World War were scattered, I thought that the soldiers took refuge in the city, poisoned themselves with water and killed each other.
And only in the end it became clear to me that we are talking about dreams. That the hero created a New World for himself, a world of dreams, and returns to the old one, remembering everything. That, everything is also a question. There were many photographs of the child, and then the author himself said that he loved to dream from childhood and it was difficult for him to accept the old city, so he created himself a Leviathan, a mythical creature that protected him from the hardships of the real world.
That is, it’s definitely a matter of psychology, but there are still a few things that I don’t understand.
Well, Ziz (aka Phoenix), as well as the Minotaur, Behemoth and Leviathan are just images from a children's book that lay in the bedroom of Messrs. What remained a mystery to me is the city itself, because there were still people there, the same Belle ... what kind of city is this and if it is a hero's dream, then where are the people from there? I look forward to your ideas.