because there is a massive difference between doing a demo and having an engine handle a game. I used Unreal 3 as an example, there are other solutions out there.
The fact that the tech demos are doing crazy stuff doesn't matter - in game with everything else factored in isn't the same.
Ontop of that , the tech demo for UE3 city thing (game name i forget) looks every bit as good as the bottom shot artistically, and i didn't see anything in the FF7 demo that looked beyond UE3 either (big city scape, cloth physics, swooping 3d camera... seems to be all covered). And again, if the engine is lacking something (cloth physics not up to scratch) then surely it's easier to take something that exists and retool it that do it from zero?
*shrug*
I'd agree that if there is some limit in the middleware that forces certain decissions on the art directors then , yeah, it would extend into the coding. Again, it's down to developers/budgets to make the call.