Originally posted by Mharr:

It's a simple 2d height map terrain system and can't really support arbitrary height differences. Digging or building to the existing limit already looks very distorted and artificial.

It is not really all about technical difficulties I think. IMO it is all about the fact that steep hills will look like giant, ugly, blocky walls, but all the ways to prevent that would either produce inhumane lags, or visual bugs. And I'm pretty sure AI can have issues with steep walls.
Once Valheim gets mod API, I'm 100% sure people would figure out ways to make terrain modification less restraining.

After all, I'm 100% sure that the actual raise/dig heights are just numbers you can raise or lower yourself. Valheim dev crew just doesn't want things to look ugly, but will eventually give us ways to change that if we don't care much about things looking good.