The contradiction between the shortage of urban land and the increasing demand for land in the Loess Plateau brings the emergence of the mountain bulldozing and city creation (MBCC) project. Large-scale hill filling and mountain bulldozing projects will cause changes in the site's hydrological environment, and induce foundation instability and damage to buildings. The long-term suitability of MBCC projects is the most concerning issue. In this study, field investigations, laboratory experiments, model tests and numerical simulation are utilized to explore the compacted loess's physical and mechanical behavior, microstructure characteristics, permeability behavior, collapse mechanism, humidification, and creep deformation. In addition, the water migration in thick compacted loess, macroscopic deformation and local failure patterns of a typical MBCC site are investigated using field monitoring, numerical modelling and InSAR analysis. The feasibility and suitability of the MBCC project in the Loess Plateau of China are discussed. It is found that the physical and mechanical properties and the microstructure of compacted loess are quite different from those of natural loess. The compacted loess has low stiffness, large spatial variability, poor pore connectivity and low dominant pore density in comparison to natural loess. The unsaturated permeability parameters (i.e., soil water characteristic curve and hydraulic conductivity function) are highly related to the soil's pore size distribution on the microscale and the soil's dry density on the macroscale. Collapse deformation is inherently compaction deformation due to decreased soil stiffness when the water content increases. It is mainly related to the local compaction of inter-particle pores with the particle and pore morphologies unchanged. The creep characteristics are closely related to the yield stress and overlying load. Increasing the dry density and decreasing the soil water content contribute to increase in yield stress, decrease in creep stabilization time, and reduction in hydraulic conductivity. The hydraulic condition in the thick compacted loess layer of a typical MBCC project keeps constant with the variation of soil water content occurring only within the top 2.0 m. Meanwhile, there is a slow downward movement of water without variation in the soil water content in the underlying soil (depth > 2.0 m), which can recharge groundwater tens of years later. The ground subsidence of this typical MBCC mainly occurs in the filling area with a decreasing rate. The cumulative ground subsidence and the time required for deformation stabilization typically rise with the filling soil's thickness. It is expected that the overall ground subsidence tends to terminate 15 a after finishing the project. In addition, local cracks can occur in the transition zone of excavation (natural loess) and filling (compacted loess) areas, which can be prevented and mitigated using engineering measures. Generally, increasing the dry density of the compacted soil and designing drainage facilities probably can effectively decrease the ground cumulative subsidence, shorten the deformation time, and reduce local cracks' occurrence. The results demonstrate the long-term stability of the overall foundation and the engineering controllability of local failures of the MBCC project. At last, the suitability principles of the MBCC project in the Loess Plateau of China are discussed.