Dirty old town is precise and sharply defined as a working class town - the lovers are not a mass of undefinable humanity, but two very identifiable human beings

It's a great song, no question. Its popularity is well-deserved, and so far as I am concerned it fully meets the criteria to be performed in folk clubs. It is certainly "folk" in that sense, and sits well alongside traditional songs. However it doesn't share most of the characteristics of traditional song, except that the tune is adapted (almost beyond recognition) from a traditional one.

I do wonder how much of its acceptability is that it is by a recognised folk musician? The same can be said about Richard Thompson's songs, his past involvement with traditional music (albeit played in a non-traditional way) gives him credibility in folk circles and makes his songs more acceptable, whereas songs by "pop" composers are subject to greater scrutiny and are more likely to face rejection, when on a blind test they might not appear very different.