when armour takes damage i think it would be a good idea to see cuts in the armour from swords, dents from blunt weapons and maybe even buts falling off, or chunks missing. this would be more emersive and would also give a visual reference for when you need to repare something rather then it suddenly not working. and the weapons would also have a similar thing so you can till before it breaks rather than it suddenly being unequiped. you could even link diffrent reactions to the armour and weapon conditions, for example if you had really looked after armour and polished and in good condition you could have people scared of you or even accuse you of being a cowered as it looks like the armour is only for display and not for uses, medium health armour could demand respect from peasants as the can tell you are a true warrior due to the battle dents and cuts, and really low health you could be regarded as a low life who perhaps picked up the armour from a dead person, or regaurded with utter fear as they fear what attacked you may have followed you to there town, guards could also keep a closer watch on you incase you look rough and you might start a fight or might steel something.

possible need to collect bits that have fallen off? but i could imagen that would get very irritating, especialy if you have been fighting over a large area.

I agree with your visual idea however I don't really feel partial towards the crowd reaction. I'd hate to come back from killing an immensely hard enemy to find an armorer and hear "You lowlife! Stole that off a corpse didn't you!?" <_<