No, Israel will never let a free and independent Palestine country be born.
They may set up a few bantustans, allow the Palestinian flag to be waved over them, and call it a country. But it won't be free and independent. That's essentially what they did with all previous "peace" offers which people falsely keep claiming were 97% of what the Palestinians asked for. These bantustans are essentially prisons with entry and exit, imports and exports, and water resources, and in fact the government controlled by Israel (I say this because that's essentially what's there now). So you are right, many will want to leave because there won't be room to grow and develop. That's part of the Israeli plan, to have only a controlled population left.
But I don't think they'll be able to get rid of all the Palestinians. Many will remain if only out of loyalty to their land and people, and to deny Israel's right to ethnic cleansing. And they will rebel, and find a way achieve justice.
Charles Swisher, "The Truth about Camp David"