I think the only real "ceiling" in this gen is storage capacity. A game like Uncharted, God of War, Alan Wake, and Gears series only look as good as they do based on what is able to be loaded while you're playing. This also results in how long a game ends up being.
Hell, the God of War 3 demo is 2.6 GB because of the amount of 3D assets, animations, sound effects, and AI scripts. This is what helps to push out better graphics - having them in the first place. For instance, if GTAIV had twice the disc space, it could have higher quality assets to load when you get right up in personal with an object. Hell, it could even have a duplicate of the city, but post-nuke or covered in snow.
Of course, it takes time to learn how to develop such LOD systems. As long as developers can get their head around these engines and pumping out several models for the LOD, we'll continue to see better character models, better environments, more effects, and whatever else they figure out to do in front of the screen.