One of the little girls was his niece?

In am not familiar with the German language, especially of that in the 1930s, but it could just be some form of slang--like how a young kid might refer to an old man as 'grandpa'. Otherwise, as for the story's overarching them that what frightens us may live right next door unbeknownst to anyone, it would drive home further this idea that anyone could be a suspect and that familial ties and relationships should never negate suspicion--it challenges familial naitivité.

In German uncle and aunt are / were used very commonly by children to address adults who are nice to them. So it wasn't his niece.