could X360 and PS3 do photo-realistic graphics at lower resolutions / SDTV res? no way, and neither would the future X720 or PS4.
however, I believe in many areas of graphics could be improved. going down to 480p / 480i resolution would lift much of the bandwidth & fillrate burden, allowing for constant 60fps framerates in games that are 30fps @ HDTV resolutions. perhaps also allowing for somewhat more complex graphics & effects due to the saved bandwidth, fillrate, RAM that is chewed up to reach HDTV resolutions.
I think that given enough CPU/GPU/RAM, a machine could render in realtime what rivals movie or videogame or television show quality CGI and display it on SDTVs. it's a problem of computing performance and rendering power. resolution is a small part of it. sure you'd need to render initially at higher than SDTV resolutions, but that's just one thing.
CGI looks so good because the vertex/poly counts in the models and environments are orders of magnitude more than what is used in games. There is far more AA sampling than any game--probably 64x AA or more. The textures & shaders are far more detailed/complex. much better lighting models are used, often global illumination, (even without raytracing), motion blur and lots of post-processing effects, plus, probably other things I'm not aware of.
Suppose there was a console that had say, ~50 times what Xbox 360 or PS3 can do in terms of graphics. Developers could then probably do the CGI found in the best videogame intros and cutscenes in realtime. If devs had ~500 to ~5000 times the performance of Xbox 360 or PS3, they could reach movie-quality CGI in realtime (sans raytracing). I'm just guestimating on how much power is needed but the point is, given enough CPU/GPU power and RAM, at 480i / SDTV res, game graphics could look VASTLY superior to what we are currently seeing at 1080p, 1080i or 720p on PS3 and X360. though we're never going to see truly photorealistic graphics in realtime in our lifetimes. what will happen is that we will see games that seem to lean more and more towards looking photorealistic, but will never see true photorealistic games.