Epilepsy warning for the latter parts of these videos, maybe?
Bonus clip where some Islanders explode and eventually turn into a polygonal mess:
This isn't a flaw in the game, it happens in pretty much any 3D engine - most games just don't have worlds big enough to run into it, or use some tricks to avoid it (like periodically moving the player back to 0 0 0 and moving everything else with them, essentially re-centering the rest of the world around the player!).
I only move stuff laterally in this video but you get fairly similar results moving vertically as well.
If you don't get what's going on, here's a video that explains it.
And if you wanna toy around with these menus yourself, this is the easiest way to enable them: