I am trying to run it in a directory where even a non-elevated user is allowed to write.

No idea why it required admin privileges but it might be to do with the confusion that making a hard link could cause. It doesn't seem that illogical (do you really want users making hard links everywhere which could cause backup loops, etc?). MS has always been a little shy over this feature, but I think I agree that if you have full control over a folder you should be able to mklink in that folder to another folder you also have access to.

At a very minimum, MS should explain this feature and why it's privileged.

I was testing an application which checked it's home running directory (it seems anyway) to know wether it's running; copying it to another directory worked in making the application start another process.

I though it would be clever to make a link to "sub" to "." (which actually works perfectly fine; and the application ran multiple times too), however when browsing in Explorer, for some reason it keeps expanding the infinite loop of symlinks! I even tried isolating the symlink in real directory; it still expanded it on it's own for unknown reasons.

So my guess is since it's so easy for someone to accidently do this, they wanted to protect "normal" users from using this - specially if using older applications unaware of the possibility of infinite loops...

Creation of symbolic links requires the SeCreateSymbolicLinkPrivilege (“Create symbolic links”), which is granted only to administrators by default (but you can change that using security policy). The stated reason for this requirement is: “This user right should only be assigned to trusted users. Symbolic links (symlinks) can expose security vulnerabilities in applications that aren't designed to handle symbolic links.” (See secpol.msc, or http://technet.microsoft.com/en-us/library/cc766301(WS.10).aspx)