Same here. I also have the latest versions, OS X Yosemite 10.10.4 and Safari 8.0.7. The only workaround I have is: Developer Tab > User Agent > Pick one of this:
Safari iOS 8.1 - iPhone
Safari iOS 8.1 - iPod Touch
Safari iOS 8.1 - iPad
The iPhone and iPod Touch don't let you choose resolutions, the iPad let you choose from 240p to 720p (no further), because it is a mobile version. I'm not sure why 1080p can't be a selection, because of iPhone 6 plus resolution, I don't know the reason behind it.
It's just a workaround that allows you to see YouTube videos at 720p as top resolution (despite the video it is available in 4K, for instance). You have to switch to mobile if doesn't redirect you automatically, press play and then choose the resolution (the option appears after you press play).
As far as I know, Apple just don't know how this happened nor how to fix it. I just hope any Apple worker can enlighten me.
PS: Excuse me if I have gramatical errors, english is not my native language.