Addressing this: because some people will buy the game years after it's debut - when all the hardcoe fans have been running around for months with the pimpest gear. If you kept getting killed trying to get from 0-max you'd have a hard time keeping up as well. Those players would likely lose interest fast, and give up on the game. Competition breeds the best of us. Senseless murder is just un-called for. If you want to beat up helpless bunnies, I'm sure there's a game for that.
Yeah, there's a high level of pride instilled into the reasoning for peoples race choices in the first place. And the fact that you can still only fight for your original faction in PvP solidifies that. The unfair discrimination you will probably encounter on foreign soil will just boil hatred for those races in PvP. There are actually arguments to the effects of, ('bordering' lets call it), for both sides -
In my model, I've already stated some reasons. I'm sure that it would really come down to the game development -whatever reasoning would make you want to return home at all...better prices, guild benefits, and the fact that you can only do quests in your home faction. (While in enemy factions you simply explore, do some small quests maybe.) These all boost hometown pride
In the freedom of choosing whatever faction you want the opposite reaction is this - your consequences carry less importance. If I can switch to the other factions at will, my pride for that faction is only as strong as the reason for why I switched. If I went over to my buddies side, then he stopped playing and I had no more friends on that team, I wouldn't be nearly as committed as I was at first. If the reason was some equipment that I could only get in that province - once I have that gear I no longer care.
Faction pride isn't automatic with any model. And the draw backs you point out for the freedom-of-choice model are present with any other as well, as long as players can create alts. While some players (usually the most devoted pvp-ers) play characters of one and only one faction, even with a score of alts, there are many others who create characters of every race and faction available and don't really care much about the factions per se.
Going with your suggestion, my preference for what I consider traditional ES freedom-of-choice, and with your response to the above critique in mind though...
They could make it relatively easy to become neutral (there might be one or more non-player-guilds that facilitate this - lets just say an Explorers Guild for instance), but make it hard to actually join a faction your people are at war with, and increasingly difficult (bordering quickly on the impossible) to keep switching (which would make sense, as you'd rightly be viewed with ever growing suspicion).
And a place where I differ with you...While I can see myself making an alt for PVP (I do enjoy it now and then), my primary interest for my main character in an ES MMO, as I've said, is in exploring all of Tamriel with my friends and family. And it would be nice if we could do whatever non-faction-war quests were available wherever we land.