Rather than just the quick and dirty specific how-to, I'll throw in a little concept stuff because this can be applied to all houses with balconies: villas, marble patios, sandstones...

You're right there is a height limit, which is 17 as Waylander says. However, the implicit assumption is that you can't stack higher than 17 above the floor, when in fact in my experience, you can't stack higher than 17 above you. In other words, if you can change your height above the floor, you can stack higher than 17 above the floor.

There are two methods for those waterfalls, one for the first/ground floor and one for the second.

To build the waterfall from the 2nd to 3rd floor is the simpler method. Conveniently there is a ladder right next to the water. :) So start stacking the cotton on the 2nd floor, and as you reach your 17 limit from you current position, start climbing up the ladder and continue to stack. You can actually stack all the way up to a height of 34 above that 2nd floor in this manner.

The first/ground floor: Since there is no convenient ladder for the 1st to 2nd floor stack, and you can't just drop items from the 2nd floor to the ground below, another trick comes in handy. --- The use of a table. :) Instead of targeting the floor tile to stack, you can use a table situated at the proper height as a target for stacking.

So, for the first level waterfall: standing on the ground floor, stack the cotton up to a height of 16 (one fewer than your limit), then add a table. Now run up to the 2nd floor and stack the remaining items that you want by targeting the table as you stack (instead of the ground). *What you add above the table will start at height 17 once the table is removed* Then remove the table (you'll have to go back to the first floor to grab it since it's probably "out of sight") and the items you stacked above it will drop down on top of your original stack of height 16. This may take a couple tries to get it looking exactly how you want. :)

You also may find there is still a tiny gap where the table used to be, in which case just pick up the cotton at height 16 and -- without removing it from the cursor -- drop it back; the items above will drop down one more.

The nightshade vines on the front steps can be built the same way. (And you may notice there is a difference between how high you can reach on that stack when standing on the front steps, and when standing 1 step higher on the first floor, or two steps lower on the ground itself.)

Hope that helps and wasn't too confusing. :)

Additional notes by Kiral

I was building another vine today (what can I say, I like vines :) ) and tinkered with my previous method a little. I found that if you float the small table (the one you use for targeting) high enough, you can cut back on some of the running between floors that can occur when you're not sure how much you want to add above your stack of 16. This one will allow you to drop your items off of the 2nd floor one at a time until the stack appears the way you want (though if you need to remove an item, you'll usually still have to run below and remove it). You'll need two to four small tables for this and a newbified, fast-decay item.

On the first/ground floor, stack your items to a height of 16 and top it off with one small table, as before. Now, run up to the second floor and drop two more small tables on the first table by targeting that first table. Drop a fast-decay item on that third table, then add your fourth table. (Note: interior decorator tools don't work at raising items when building such tall stacks, so yes, decay items still have their role :) ) About a minute later, your fourth table is floating, and you can remove the other three by returning to the lower floor and grabbing them. The reasons for floating a table that high are that the table remains out of the way of your creation as you build, and it has the peculiar ability of forcing the items that you drop on to it to immediately fall to the stack below.

So, back on the 2nd floor, this floating table becomes your tool for building the rest of your stack. Now just drop your items one at a time on to the table and they should immediately fall down on to your stack below. If they don't drop, then the table wasn't high enough, but that's not a big deal: simply drag the table and drop it onto a spellbook, which allows the items above it to fall as intended, and causes the table itself to snap back to its floating position.

And that's all there is to it! :) Or almost...

Notes on house-specific quirks:

Marble patios: As you've seen, this works on the front steps (except next to the house sign) and just outside the patio archway, as well as the balcony of the 2nd floor.
Villas: You can build these tall stacks not just on the first row of tiles below the balcony, but the 2nd row of tiles as well.
Log cabins: Doesn't appear to work, I haven't been successful in stacking here. Anyone else?
Sandstones: You'll have to stack to a height of 18 (instead of 16) above the sandstone steps before placing the small tables. To stack that high, make sure you are standing on the floor of the sandstone under the overhang, not the steps themselves.

One last note, my thanks to my unwary friends whose houses I snuck into in the dead of night in order to quickly test the aforementioned quirks. Cloaked by darkness, deftly scampering up balconies, for a time I had become... the Phantom Decorator. Lock thy doors or else! :P