I noticed that right away when I first started getting into GT4 back in 2007....GT3's graphics look more "complete" than GT4's. Complete is a bad word, but I can't really think of any other one. GT3's replays are much more vivid, the cars don't look as much like model cars. Hell, I'd say GT3's replays often look better than GT5's.
I think it's the fact that GT4 has so many more cars than 3. For whatever reason, a little bit of quality had to be sacrificed it seems in 4. But yea...I compare Deep Forest from GT3 to 4, or Grand Valley, or a couple other tracks, and 3 just has more of an eye-catching appeal imo.
GT3 and 4 don't look 100% photo-realistic, they both have their flaws, but you have to look really close to find most of these flaws. Most of the "flaws" in these games are off to the sides. 2-dimensional cut-out people. Wallpaper trees, stuff like that.
But at least the shadows looked like shadows, not jumpy, pixellated messes like in the newest game! At least everything looks as though it's finished in 3 and 4. Don't get me wrong, GT5's lighting effects (except shadows) do look awesome, but as we all know, the game doesn't look finished-up like 3 and 4 do.