The closer rendering comes closer to underlying physical principles, the more game engines will become world simulation engines. Various engine parts commonly seen today will converge towards a common point, where, for example, we'll observe less distinction between physics and rendering layers. I wonder if this trend can be traced to some degree even today. Several orders of compute growth later, we'll look upon current abstractions in the same manner as on the 30 years old state of the art, shaped by technical limitations of the yesteryear, obvious in hindsight. Love the perspective this puts the things into.
I disagree. The goal for most games is not to simulate the real world accurately, but to be a piece of entertainment (or artwork). That sets different requirements than just "world simulation", both from mechanics point of view and from graphics point of view. So engines will for a long time be able to differentiate on how they facilitate such things; expressivity is a tough nut to crack and real-world physics gets you only so far.
Even photorealism is a shifting target as it turns out that photography itself diverges from reality; there is this trend of having games and movies look "cinematic" in a way that is not exactly realistic, or at least not how things appear to human eye. But how scenes appear to human eyes is also tricky question as humans are not just simple mechanical cameras.
Gameplay is directly influenced by the "feel" of the world. I am not strictly talking about photo-realism, but (1) how the world reacts to input (2) how is it consistent.
Physics is not about real world accuracy, but about how consistently stuff interacts (and its side effects like illumination) in the virtual world. There will be a time in the future when the physics engine will become the rendering engine, just because there are infinite gameplay possibilities in such a craft.
