Well just look at what they were able to do with the PSP GT. I say its in-game.

If it is not real-time, Polyphony wasted a lot of time on a CG trailer trying to make it look real-time. There are shadow glitches, clipping issues, Low poly objects, and low res textures. What would be the point to making a CG trailer if you are going to compromise it?

Chris Roper from IGN said it was real-time, and with God of War 3 and The Last Gaurdian both running at 1080p it seems very realistic.

So does this confirm that the graphics were so good that most people actually thought it was CGI?

It definitely looks in-game when i watched it through the PS3. There are issues like KBG29 said which reinforces the fact that its using the in-game engine. I think they just touched it up here and there like the replay mode.

Dammit, the inner fanboy in me wants to get every single person who said (along with me, I'm guilty) that the trailer was CGI and to call them out when they later say that the graphics on GT5 aren't that good.

the graphics of GT5 are CGI-QUALITY

I figured the car models were in game as were some of the effects (the dust in the rally scene), but some of the environments (especially near the beginning of the trailer) seemed pre-rendered. Either way, both this and Forza 3 are absolutely gorgeous.