Damage would be nice but it's not necessary. Plus people have to remember there are many limitations when it comes to damage.
Crashing a car in reality has a billion different outcomes based on various forces and factors.. no computer is up to accurately handling all of these as well as everything else. I know there are crash modeling computers but if you show me one of those that can accurately model every possible crash outcome perfectly down to every last shard of glass or metal as well as looking as visually pleasing as GT4 does then I'm wrong, but I don't think such a thing exists.
Damage in games is always limited. You have a few set crash animations and a fairly unrealistic limit to the effect that the damage has on gameplay.
You've got all the animations, physics calculations, sound effects and visual effects... coupled with making almost every single entity on the cars flexible and breakable. Oh and don't forget having to accurately render the internals of every car and thousands of different possible scratches and millions of possible dents and bumps... all sorts of other things.. not to mention the wreckage from whatever you crashed into. None of this is easy and considering the PS2 is stretched by GT4 without all of this then I don't think it's gonna happen.
I'm perfectly happy without damage, I like the cars looking nice and I don't mind hitting a wall and not crashing violently. I wouldn't mind more pain for hitting walls and suchlike but it really really isn't necessary.
99% of the game I spend driving, I'm not hitting walls and rarely spinning out... considering all the major effort it would take to model damage accurately for even one car let alone 500... it would all be for nothing for me.. cause I would rarely see any of it. The only way I'd get to see it is by deliberately trying to crash, or seriously making a bad mistake. I just don't think the work it entails warrants the extra feeling it adds to the game.
The damage in most previous games is a good example of why it's not a great idea to add it. It's never realistic... why would anyone make it fully realistic because people wouldn't like it. Games have always had chances/lives/continues and this is apparant in racing games. Imagine trying to complete Sonic or Doom etc without getting shot or making a single mistake once.. and no saves whilst doing it either. It would be pretty stupid and unfun and not many would bother.
There are more exciting things that can be added to GT4, such as more tracks, changeable weather, more cars, more tuning options, more racing options, more optimised online play, improved physics etc.. They are all more important to me than damage. I already know that if I hit a wall I lose time so I don't do it, that's all I need to know and I am disapointed when I do hit a wall. I always try to race without making a single mistake even if it means driving slightly slower. Being someone who does a fair few OLR's I always avoid wallhits as they usually mean time penalties or make the run invalid. I don't need my paint to get scratched or my headlight to be cracked or my wheel arch to be dented to know not to hit walls. It's common sense. If I want visual eye candy crashy crashy crap I'll play Burnout or something like that. If I want to drive I play GT.. it's as simple as that.
ramble blah said half of this before already
