You can only choose one. Shit image quality but realistic graphics. Shit graphics but pristine image quality. 

It's all about striking a good balance.

Both extremes are kinda crappy; there's no point in rendering a ton of next gen lighting and geometry if it's lost amidst all the blur, but at the same time, an ugly picture at 4K is still ugly.

Have you looked up close at FF7 Rebirth final cutscene on base ps5? It is a pixilated mess yet it looks incredible. 

Also games can now make body cam, cctv and low image camera footage look real, almost.

1080p and beyond graphics trumps resolution

720p is where they are somewhat equal, because it's the minimum resolution required for display current industry graphical standards

Bellow 720, resolution is more important but there is still a minimum graphical quality required otherwise the game will still look bad

PS2 can draw more polygons than Dreamcast. PS2 is roughly maxed at 5-6 million. DC is pretty much maxed at 3 million (some games pull some tricks and kinda get it to 4 million) . I bring this up as PS2 also had lower image quality and a lot of jaggies. Dreamcast was well known for how crisp and clean most of it's games looked esp from SEGA. Because of that I prefer how Dreamcast games look far more than PS2 even if many are technically inferior on polygon counts. I much prefer a clean image. I don't need every shiny whistle and bell if it slows the game down and brings the resolution way down. 1080P 60FPS over 4k 30FPS anyday.

Sharp clean image. I also prefer a strong art direction vs just raw graphics.

Image quality over graphics

I can play ancient games from NES without the crappy CRT Filter and bad low resolution - I wouldnt mind.

It's a balance and really depends what aspects of graphics/image quality we're talking about.

For example I have no issue with 1080p resolution but I do have issues with FSR artefacts and image break up which make games look noisey in a way that regular HD resolutions do not.

I'd say prioritise graphics until we start slipping below 1080p internal res, then prioritise image quality. Depends on the look of the game as well

For VR, graphics over image quality.

Simple reasoning, PSVR1 games felt more immersive while PSVR2 games feel more fake. PSVR2 has mostly Quest ports with improved image quality, which look like remastered ps2/ps3 games.

More believable lighting and detail add to immersion. RE8 has plenty aliasing issues in the castle and relies on reprojection but feels so much more immersive than 90 fps Song in the Smoke for example.

So basically...

vs

Both? both are bad.

Honestly if taken to the extreme (which more often than otherway around), its much more common that its super Low-setting visuals.
I think I rather have "Shit image quality, great graphics. " than the other way around.

Slightly low res or blurry is better than just being ugly to start with, at high resolutions.