I seriously cannot understand if you're being sarcrastic with this or not, no, I cannot. Obviously that C64 game isn't scary, but the whole review is trying to make the point "Ugly=Scary". And no, the first Resident Evil isn't scary, and certainly not because it looks like shit. When something looks like shit, it doesn't look real and breaks down our immersion. Immersion is what makes a game scary, and good graphics increases that feeling, about the "pretty" thing, that's just purely aethetics, nothing to do with uglyness.
If you're being sarcastic, well done I guess, if not...you're completly wrong. People are more scared of things that look real than things that look fake. If what you're saying is true, than one pixel, just a square, would be the most terrifying thing ever in games, and an obvious handpuppet would scare you to death. What matters is immersion and atmosphere, not quality in graphics.