They're definately working on the sequel, they're just taking their time. As far as I know, next gen consoles haven't been announced or hinted at, so they have time. Even so, how much further do graphics really have to go? I'm pretty sure they will bring back lots of aspects of last gen's games that everyone missed in 4, and they're going to do it better than before, so take your time, Rockstar!
Anywho, this "city editor" would work sort of like Sim City. Players could model buildings, share them online, and even do entire cities. This way, if you only wanted to make a city without designing the buildings, you could zone areas, and they would be populated with user-made buildings. The tricky part is where to store all this. For seperate cities, you could save them to your consoles hard drive, but for an entire globe, I think there'd need to be a huge server network, all online, and it would basically beam the globe into your console every time you played. This would take a lot of bandwidth though, but one day, it will be done.
Probably see smaller scale advances on such an idea next gen