Not necessarily! I haven't worked in schools since this law was introduced, so I don't know how it works. I agree that the terrorist/terraced house story is ridiculous and the people involved really should have used some common sense.
Teachers are in a very good position to monitor children's and families' behaviour, but I wonder how many wannabe terrorists have been caught. I know that reporting of child abuse, which teachers were also supposed to do, didn't work very well. I reported a few cases, but apart from one when the abuser admitted his crime and was jailed, I don't think other cases were followed up through lack of staffing in social services and the police.
I seriously wonder where you draw the line. I don't suppose there are many children who tell their children that the spare bedroom is full of bomb-making equipment, but is it really suspicious when an uncle from Iraq comes to visit?