I think it has less to do with hardware, and everything to do with the tools used for making games.
I can imagine a tech demo that looks like that trailer. If you have 50 artists and a few programmers devoting their time to make something look like that, the only thing that's going to hurt their end product is time. Not the hardware.
The question is can the artists/programmers make an actual game (with physics/AI) that looks like that. Well, again, we aren't questioning hardware, but the people making the software. If software tools can speed up the process, I'd say yes.
As you say, it looks like it will happen at near the end of the consoles life. It's all about the approach and technique of developing software, rather than the hardware itself.