So basically after having a head-ache with permissions and ownership, I came across the final solution. I have a secure ftp user called 'wp-user' which I got from the tutorial here a while back. Apparently the fix is very simple, and it's not a permissions issue.
During the set up process you define FTP Components in wp-config with the following lines:
All you have to do is move those lines above the line which says:
/* That's all, stop editing! Happy blogging. */
Apparently the media uploader freaks out when the FTP Components are below that line, despite the plugin updater working fine.
Hope this helps anyone who had this similar issue.
WordPress is the most popular content management system (CMS) on the web currently. While WordPress can be a great way to manage you content, there are some very insecure configurations that are given throughout the internet. This article will cover how to set up secure updates and installations using SSH keys instead of FTP, which is an inherently insecure protocol.