Home games give the home team an advantage of course. I am sure that a quick check for the statistics would show that Real Madrid is stronger when they play in the Bernabeu stadium than when they play away from home, but this isn't surprising at all. You can see it when Dortmund plays. They are not a good team right now and yet they play very well when they play at home. But it's quite normal I think when tens of thousands of people are chanting for a team instead of playing against a strong opponent who gets all the support the whole game.
But of course there are limits to the effect that the support can have. The missing players could become a problem, but luckily for Real Madrid, Manchester City is far from being the dominant force that they used to be in the past. Chances are still good for them to advance to the next round.
Although home games give Real Madrid an advantage, the final result is not necessarily certain because after all the two have met in previous seasons so both coaches will definitely see weaknesses in the opponent's side to exploit. Real Madrid have weaknesses in their defensive position and that is quite dangerous against Man City because Man City's front line has the ability to break through Real Madrid's goal if not guarded properly so Ancelotti will have to work hard to find a solution.
Man City itself is also not as strong as the previous season and there are the same weaknesses in the defense line so that both teams will try to cover up these weaknesses. Real Madrid can take advantage of this match to get a win but Man City will not let them easily get three points at home.