First off, let's define Realism.
Realism, when it comes to video games,is the extent to which gameplay mechanics adhere to our objective reality. Pedestrian examples of realism are 1) gravity, abandined things fall downwards.
Sounds like a fairly good description, for obvious reasons, I think that we should also limit said realism to things that would be applicable in real life. It's silly to ask for realism in magic because we can't use magic in real life, the very presence of magic is unrealistic, and therefore, how exactly do we define what kind of magic is "realistic" and what isn't? On the other hand, gravity is something we do see in real life, and unless we're told otherwise, we can probably assume that gravity in your fantasy setting works like it does in real life. Even if you tell us that gravity is actually earth spirits holding people and objects down to the ground and pulling them back down if they get off of it or something like that, it may not work on the same principles as how gravity is currently scientifically understood to work, but we can probably assume that, as much as it would affect the gameplay and story, it works like in real life. Similarly, we can assume that in the world of Tamriel, getting hit by a sword has roughly the same effect as in real life, of course, the gameplay might not accurately reflect this, but this comes back to a question of just how much realism we want in our gameplay mechanics.
Another factor to consider is internal consistency, if we look at realism as how consistent a work is with real life, then internal consistency is how consistent it is with itself. Internal consistency is what we get when a work defies the rules of real life, but still follows its own rules, and applies to things that depart from real life. Let's say you have a setting where it's established that magic can't bring people back from the dead, then not breaking this rule later on would be an example of internal consistency. Works lacking internal consistency can end up suffering from plot holes or continuity issues, and in fantasy and science-fiction, that can do more to harm suspension of disbelief than lack of realism. That's not to say that in fiction, you can never change things or contradict previously established things, because just as in real life, things can hange over time, in fiction too, things don't need to remain completely the same eternally, and somethings, things that were once established could be proven wrong. In short, internal consistency is important, more so than realism, but it doesn't need to be a strict constraint that limits creativity.
Now, back to the subject of realism, realism in games can be a tricky subject, because a degree of realism can potentially enhance some games, but making the game too realistic will end up making it boring and annoying, thus, the best approach is to find just the right balance of realism. It's important to remember whenever this discussion comes up what video games are about. Video games are a means of entertainment, we play them to be entertained, not to see what life would actually be like in a given scenario. Therefore, how much realim a game should have should be however much is needed to make it as entertaining as it can be. In that respect, how much realism I'd want depends somewhat on the nature of the game. I certainly wouldn't say I'd have enjoyed Just Cause 2 more if the developers had tried to make the physics remotely realisitic, on the other hand, I don't feel that my enjoyment of S.T.A.L.K.E.R. was ever diminished by the fact that I can't jump ten meters into the air or tear bloodsvckers apart with my bare hands. It comes down to a matter of genre. In the case of the Elder Scrolls, I wouldn't mind a degree of realism so long as it doesn't become detrimental to the overall gameplay experience or the escapist fantasy aspect of the series. I wouldn't mind more realistic physics, for example, so long as we're dealing with mundane things. I wouldn't mind a slightly more realistic damage model than past games had, though not completely realistic as allowing level 20 characters to potentially be killed in one hit by level 1 characters if an important part is hit would diminish the impact of characters' abilities on the game, location damage would be perfectly fine with me, I wouldn't even mind a crippling system similar to Fallout, though at this point, that doesn't look likely. On the other hand, needing to eat, drink or sleep is going too far in that direction and would just become annoying, same for not being able to swim in heavy armor. I'd also like to see AI behave realistically, both in combat and otherwise. NPCs shouldn't just throw themselves suicidally at me unless they actually want to die. They should behave intelligently, at leaat within the limits of what the AI is capable of. Outside of combat, NPCs should react logically if they find a body in the middle of the road, for example, and if I enter someone's house and go up stairs without permission, they shouldn't just ignore me. At the same time, they shouldn't go crying "Theif! Thief!" if I try to pick up the item I just accidentally knocked off the shelf and put it back (Now if I take it and walk away, on the other hand, THAN they should call the guards.) Having NPCs behave more intelligently during gameplay not only makes the game more realistic, it can also add additional challenge, and if done well, it can be a good thing, so long as there are constraints to prevent the game from descending into complete chaos as a result of AI being good enough to allow NPCs to be able to mess up the game but not good enough to prevent them from doing so all the time (Like what Radiant AI was in Oblivion before Bethesda decided to limit it.). In general, if adding a trouch of realism to the game could add a new dimension to it and make it more enjoyable as a result, than it's probably a good idea, if it would just become tedious, albeit realistically so, then it's not wanted.
In terms of the design of the game world, graphics, and writing of the game, I'd like a level of realism so long as the designers don't forget that it's a fantasy game. When it comes to equipment, I don't want full realism, having every armor or weapon be completely realistic would get boring after a while, and would just diminish the creativity of the world, and creativity is what fantasy SHOULD be about. Bring on the horned helmets and spiky armor I say, so long as I can still believe that the armor would protect someone and that the weapons could kill someone, so I draw the line at chainmail bikinis, the environments should look believable so long as they don't become boring and uninspiring as a result, Morrowind did a pretty good job at this, I think, showing us a world that felt like it was different from our own, but still felt plausible, from what I've seen so far, while Skyrim is slightly lower on the fantasy scale due to being in a less exotic province, it still seems to be doing a pretty good job at looking believable while still capturing a degree of epicness and creativity in is environments. I still expect to see farms and villages, and cities should still feel like places where people live, ancient ruins should feel like they've been neglected for hundreds or thousands of years, and so on. In terms of the writing, people should act in ways I could see someone behaving in real life where applicable, and react to the differences between our world and Tamriel in ways that are believable. Magic may not exist in real life, but in a fictional world where it does exist and its practice is common, I can believe that people who can use it might make a living offering magical services, just as someone who has learned how to fix cars may make a living doing that in real life. I want to see NPCs with regular lives, they shouldn't just be devices that exist only to provide information on the game world, services, or give quests, in this respect, improving on the AI could also help a lot. When NPCs go somewhere, it should feel like they have a purpose, whether it's to work, eat, drink, paint, or something else. They shouldn't just go somewhere to stare at the wall for several hours before going home. Though in writing having characters act believably is important, the writers also shouldn't forget that they have fantasy elements they can make use of as well, allowing for story telling oportunities that wouldn't exist in a fully realistic setting. Since we have dragons attacking cities, why not show us what the authorities are doing about it? Are the people in charge actively trying to put an end to the dragon threat? Or are they just keeping the guard in the city and hoping that they can protect it if a dragon decides to attack? Are people panicking? Of course, dragons aren't the only fantasy element that writers can use to their advantage.
Toilet stuff are kinda unnecessary and would turn the game into a pain in my opinion (at least I can't think of a way of it working good).
I'd argue mandatory eating, drinking and sleep would be the same. I've yet to play a game that includes such things where it actually added any challenge since they were plentiful enough that you really had no trouble maintaining a good supply of them, thus, it becomes more a chore than an actual meaningful part of gameplay. And if the game made food rare enough that finding it is actually a challenge, then it would become annoying as you'd constantly have your adventures interrupted by trivial things like needing to find food. Just imagine if your nearing the end of an epic final dungeon to confront Alduin, and are just about to go in to face the one behind the whole crisis, and then suddenly, you need food or will face weakened stats, yet you just exhausted all your food supplies, so you have to trek all the way back out of the dungeon to go find more food so that you'll be able to confront Alduin at full strength. That does NOT sound like my idea of fun at all.