This step requires that you provide a water supply to your citizens. You can use either fountains or well, but fountains are much to be preferred. Well should only be used when supply of water by acquaduct and reservoir is not possible.
As soon as the water is on you will see the tents change size from small to large. If you were to go the point where thr Road To Rome enters the map, you would shortly see more settlers arriving to fill the new housing available.
Maximun Population per housing square is = 7
Prosperity Cap = 10
BTW: If you want to know what this Prosperity Cap business is all about, go here
Our next move will be to bump the housing level up to small Shack.