I think the main thing about LFS at this particular stage is that it's already an incredibly solid platform on which the developers can build. When the graphics do get an upgrade, it will be easy to see just how far ahead of other sims LFS really is.
Computer games are a visual medium, they're delivered graphically, so having a nice presentation really can help a game, but there's only so much you can do with graphics in order to mask or divert attention away from weaker points if the underlying system isn't strong- the novelty value will surely wear off sooner or later.
Having said that, it seems that the console racer is really starting to evolve (as is natural), and people are beginning to demand more sophisticated physics to go along with the pretty graphics. Simply having the simulator option in GT5 means there's a sizable portion of players who want this mode, otherwise the devs wouldn't have bothered. A little competition is good for the customer, and no dev team should work within a vacuum of other competing products, atleast imo.
Just keep in mind where LFS is presently, where it counts, and you'll see that it's probably going the way it should.