I had the same problem, but there were also 2 enemy town nearby. After razing them i found 1 spot that could be settled, when i did i encountered an even more annoying bug. Which i posted here
I'll copy paste what i wrote there:
This bug is so weird, i hope anyone can follow it. Possiblity to attach savegame to this post would have been handy.
Well, here goes. After clearing out the imperium lands while having a quest to build a city on its ruins I ended up building the city.
After the city was build, i noticed it had the same name as my capital, till i saw the population number and knew it WAS my capital. At least, when i click on it, i go to the build/train queue of my capital. I haven't tried building anything on the other site yet, since all was build already sofar in my capital.
On the edge of the screen where all your cities are, i now noticed also that a new city was there, with another name, the one actually being there in the imperium, but there is no way to go to that city's build queue.
So here i am having build the best located city, with nothing i can do to actually build the city up.