Is the ceiling in hell supposed to be that low?

Solution 1:

As far as I know and can find, there haven't been any changes to Underworld (Hell) generation in 1.3 or since (or even before for that matter). There aren't any changes listed in the 1.3 changelog or Underworld wiki page. (There's new music though.)

To me, your Underworld ceiling looks maybe a bit low, but nothing out of the ordinary, and the lava seems normal. I find that parts of the ceiling often is touching the buildings (Ruined Houses, to be exact). I'd say it's just some unlucky random generation that made it out a bit cramped like that.

As for fighting the Wall of Flesh, you can always level some sections of the Underworld to make it easier to fight (make flat platforms, etc.). Hopefully there are some suitable areas in your Underworld for that.