Adrian,
This is really fascinating. I am hoping that you are continuing this work. I may be missing something here, but for block detection, why not go ultrasonic sensors with the Pi? I have used similar products with a STM micros and have had great success for detection and rate of change calculations. You could even do a train based detection system. This would require complex filtering like Kalman filters for self awareness(adjusting the output using velocity calculations and tailoring it to corrective position display), but you theoretically could communicate with each locomotive and display which block it is on. You could use MATLAB to model the layout geometry and such, or nestle in checkpoints that blend in with scenery to make the corrections easier. Or even a Passive RFID system (This seems like it would be really troubling, though. Between common mode noise and EMC compliance it sounds like it would be a nightmare.) I am wondering if "not touching the layout at all" literally meant nothing, but just a camera. Either way, I am loving this idea and I am excited to see what else comes of it. I may have to try it myself. 
James
