And if they invest it at 2.5% + inflation, they'd never run out their capital either.
So your conclusion is incorrect.
The way I see it, land (+ house) provides inherent value - ala equity in a stock, and unlike gold or cash. So buying a house, is an investment, since it'll presumably last beyond your lifetime, and continue to deliver value.
Still, though, depending on a lot of factors, his parents may or may not make out net positive in the end.
Thinking about it a bit more, though, I think I'm harping on the wrong thing here.
Whether or not you come out ahead has nothing to do with whether home ownership is an asset or a hedge. You can certainly come out ahead with a hedge: that is, the instrument that you use as a hedge can turn out to be a source of income in the end. That's part of the reason that it's there, to provide a possible gain to offset a possible loss. But that doesn't make it an "investment" after the fact. It's still a hedge.