Would you say its the choice from MS & Sony to go for cheaper hardware compared to previous generations or that hardware is progressing at a slower rate?

If by diminishing returns you mean the progress is not as fast as it used to be then I agree. The Graphics dont get better that fast anymore. Partially also because the progress in Computer Technology slowed down a bit. In the late 90s early 2000s everything went super fast and graphics made huge jumps. 1998 Half Life just 8 years later. Progress slowed but its still there and I think if CPUs and GPUs would have improved at the same rate we would have 4k 120 FPS by now. And overall better graphics.

Since Splinter Cell Chaos Theory nothing has blown my mind away apart from Gears of War and Uncharted 2. Since then games started looking the same.

Same here my Oculus totally rekindled my love for VIdeogames. But especially the Rift shows how we need way way more power to drive better Hardware. 

Crysis 1 with texture mods.

That game was beautifull for its time, and I dont honestly think we ve moved much past it.
I dont think we can.

Graphics are at a point where, its too costly to do things better, and you have to ask the question of if its worth it.

Unreal and others work on making graphics cheaper and easier to implement which is why low budget games can easily be pretty too. Its getting cheaper and cheaper to do things better. And new graphics technologies actually work on making better graphics while making the life of the designer easier.

Pretty sure a Crysis like game costs a fraction of what it would have cost back when it was released. 

There is literally no difference between 720p30 and 4k120.

With some added "reality"

Clearly it was with the shift from PS360 to current gen console grafix, that's when diminishing returns kicked in in a noticeable way.

But we're still making great progress. Last night playing Battelfield at the end of my session when I first had gotten sleepy but then awakened again a bit, right then I felt like I was in a real war, it looked so realistic. I couldn't tell fiction apart from reality.

Battelfield is almost photorealistic.

I don't think it has reached diminishing returns for me yet. I don't need photorealism and I truly appreciate stylization and unique art styles, but I still think even stylized games can still gain in polish with modern techniques.
We've seen so much improvement in lighting, Shadows, bump mapping etc. It's these little things tha really add to the immersion for me.

Captain Toad for example is a gorgeous game thanks to all the little flourishes Nintendo put into it that would not have been possible without the overall advancements in graphics.

And people might have been mostly joking about it, but TLoZ Breath of the Wild would feel very diffrent without it's vast, filled to the brim grassplains. In fact realistic, or rather full, foliage is one of my pet peeves. It's been advancing steadily, but wer're still not really at the point where we see rich open fields with waist high interactive foliage, or wild jungle vegetation. Foliage is usually still too sparsed out and that actually takes me out of the immersion.

I really dislike it when foliage on a cliff just just suddenly turns into green to grey texture instead of gradually showing moss and plat covered stones shining through and the tufts of gras getting thinner and more sparse until you hit the cliff edge.