Is there any progress on this?
No, as far as I know, there’s still no idea how to fix this.
I assume contacts synced from a Google account manage to have hi-res photos… how does that app get around this issue?
I guess we will never know because these proprietary Google apps are not open-source (which is the reason why I don’t have them on my mobile phone).
By the way, https://code.google.com/p/android/issues/detail?id=73499 has just been closed as “obsolete” without giving any reason or explanation.