I don't know, when i look at every videogame in existence and then watch a movie or just outside my window, i think we are still light years from photorealism and even more light years away from a facade that doesn't crumble during motion between animations, ai, interactions, physics, etc.
When vg are gonna reach the highest level of movies cg then we can start talking about diminishing returns.
If we had infinite power available and the improvements were small then sure, but with limited power can we really say that we did all we could with real time graphic? it's more a lack of power than a lack of possible huge improvements.
I know what you mean when you say going from mario 2d to mario 3d is gonna be hard to replicate, but many aspects of graphic today are still in their infancy, ai, physics, animations, realistic interactions are still in their 2d phase, i think people are gonna be as impressed as 2d mario to 3d mario when water and hairs in games are gonna act like real life water and hairs, at least us graphic whores.
this stuff impress me as much as mario 3d
(and it doesn't even look like real life)