> Yes, the demand really is that low.
Do you have any evidence for that?
There are virtually no, modern, reasonably-specced and reasonably priced phones with smaller screens available currently, so it's no wonder they're not selling.
In the Android world, there's only a couple of low-end Nokia phones (Nokia 1 - 4.5" screen and Nokia 3 - 5.2" screen), low-end Samsungs like the Galaxy J3 and the high-end and expensive Sony XZ2 Compact available but these phones aren't available for sale in many shops or on many contracts. If the market doesn't produce modern smaller phones, then they can't be sold, so arguing that "the demand really is that low" is currently a circular argument.
I suspect that part of the reason why the resale value of older iPhones like the 6 and 6s are high is that a reasonable percentage of people, esp. women, want smaller phones like these iPhones which are still reasonably fast and quite usable. My girlfriend hates using large phones as she finds them too big to hold in one hand easily, and has kept using an old Android because of its 4.5" screen.
I'm a tall person - well over 6 foot - with largish hands and even I find it difficult to comfortably use a phone wider than 70mm. I also find the current trend of producing 18:9 ratio phones completely baffling, as it makes reaching the top of the screen impossible with one hand in situations like traveling on trains or buses. Widescreen videos are filmed in 16:9 ratio, so it would make much more sense to go back to 16:9 ratio phone screens.