I'd also disagree with PD not trying to make something realistic with GT1 and GT2 - they were pretty high up the ladder of sims when they came out, with only much more tightly focused PC titles like the Grand Prix series and Papyrus' games significantly above them.
Wake up. It's a realism lacking racing game marketed as a simulator and it always was. It has a niche - people who are not interested in more realistic car behavior or people who couldn't handle a more realistically bahaving car. Besides, a dumbed down racing game is easier to play if you don't have any analog input available. They could have easily made cars to oversteer more and that would have not taken more processing resources from the console. Ok, perhaps a more advanced AI model would be a bit more CPU intensive, but not physics in this case.
I didn't know that rFactor had tire pressure and tire temperature physics, but I meant softbody tire physics like in LFS (which is not necessary to make a good simulator).
Essentially there would be three ways of making GT2 more realistic:
1. A least game changing way would be to just make cars way more oversteery when provoked, and perhaps improve physics some, to also allow for understeering behavior, as well as various situations where understeering changes into oversteering. It should be made so that cars were considerably more difficult to handle (to correct oversteer) in oversteer situations. This alone, without additional tire models would add a lot of challenge and force people to play with analog sticks, and use a lot more driving technique. AI behavior should either be corrected or the new physics model could be made to only work for player car (if possible).
This way, GT2 would become a much more serious game, while still retaining the very important aspects of original charm and feel. It would still be playable on PS1. If by a chance it would be slowing down on PS1, the number of AI cars on a track could be reduced by two and that should fix it.
2. Another method would be to completely rewrite physics and AI, making the game even more realistic. Perhaps add new features (parts damage and repair or repurchase, tire pressure settings, etc). It would lose some of its original charm and feel. Perhaps it could only be played on emulators or other consoles.
3. Lastly, like you've said, it is possible to just take a modern physics engine and write a GT2 clone on it.
I have no doubt that there will be very realistic GT2 clones in the future (my guess is within a timespan of 11 years), because it's such an iconic game, but before that, it would be very cool to see a realism mod done by the guidelines of the first method. I think it would take much less work than making a clone.
The way I see it, you can make realistic car behavior in a PS1 game and keep it playable on this console, as long as you keep the parameter tracking and updating values within the performance limit. In other words, there can be more physics parameters and more complex algorithms if their update speed is low enough.
To be honest, I'm not personally very interested in upgrading GT2's general physics, because I still want to enjoy GT2. It would feel like an other game otherwise.
When choosing mods for an old game, I also see a lot of importance of maintaining the original feel of that game, and many times, with its flaws included. Classic games are special not because of how convincing they are, but because of how they feel - because of their atmosphere. So for instance, update the graphics too much and you have lost some of that very important atmosphere.
However, Gran Turismo 2 was advertised as a very realistic racing game, which means, it's supposed to have a realistic car behavior model. If it actually doesn't have a realistic car behavior model because of PS1 technical limitations, then making it more realistic would take away from the PS1 authenticity of it. In this case, would a more realistic version of it be more enjoyable for a realistic racing fan? Yes, but it would be less enjoyable for someone who wants to experience an authentic PS1 gameplay.
If however, the developers made it this way not because of PS1 technical limitations, but because of marketing reasons, then making it more realistic would, in a way, purify it. In this case, it would be GT2 the game it could have been if the developers would have been true to their promises of "ultimate driving simulator" and not trying to fit it in a niche, by dumbing it down, to maximize their sales. Then the game would be more realistic and still very much enjoyable for someone who wants to experience a PS1 gameplay, with all its technical limitations and charm.
Of course, the most unique version of the game is untouched, but by using updated cars (I assume you are using them), you are, albeit in a smaller way, also changing how the game feels. That's all fine of course, because a racing game, which was marketed as exceptionally realistic, and which has real world cars in it, should represent reality quite well, regarding car specs and car handling.
Aren't you bored of playing it for so long, with this dumbed down car handling model? Don't you want it to give you more challenge? Don't you want to see GT2 in its full glory - being a game it could have been if the developers were dead serious about everything except marketing? Perhaps the real reason because of which you wouldn't like to play an improved physics version of this game is that you are not a racing sim fan, meaning, you don't appreciate high realism and challenge in racing games. Am I right?