650,000 people for such a large area isn't that much of a big deal really. It's just really under populated. There would have been entire regions of the world in the middle ages that are just as big and just as under-populated. Geographically for Deepwood it would benefit them given that Risen ran off the previous notes that all the southern borders are shielded by mountains, which for advancing armies would make expansion south-ward very difficult. It would have made a significant enough natural shield that an underpopulated region could be very well defended against some more organized states.

As well, heavily forested regions don't tend to loan well to large populations, since all things considered the trees could be the only thing holding the soil intact and there's not a lot of nutrient turn over there so agriculture may not be that great. But even if the rains aren't a problem washing the top-soil away then it's a simple matter of there being too much work to simply clear the land, or cultural ideology on the protection of the forest.