Exactly so! That's still why I love Touhou. It's very rare for a work to perfectly encapsulate that fairy tale fantasy feel, and yet Touhou does it brilliantly. Especially with the older works. It really does feel like a child's fantasy, and I think that is why a lot of the newer Touhou works don't "seem as good". They still retain that element of "fantasy", but just not as strongly as it used to. While I think that UFO and TD are good games in their own right and Byakuren and Miko good characters in their own rights, I feel that introduction of them is what started the "watering down" of much of Touhou's deep "fantasyness". Though, as I said before, even the newer games and works retain that, but just as well.
And ultimately, the old artworks before UFO are what especially made Touhou's "fantasy" the way it is.