I've been following this story closely and reading European newspaper sites, such as Austria's "Kronen Zeitung," so I've picked up much information.
To answer a few questions: this story unfolded in an apartment building owned by Josef Fritzl. He apparently rented out a few apartments on the first floor (the second in American parlance), while he and his wife lived on the top floor. The basement was off-limits to everyone, only he went down there, by his decree. Apparently, he was a "despotic patriarch" (says Frankfurt's 'Allgemeine Zeitung") who ruled his family with an iron hand, and his adult children by his wife have confirmed this. No one was allowed to enter the basement, which was heavily soundproofed. The space where the daughter, Elisabeth, and three of her children lived was evidently so well-hidden that the police couldn't find it even after being told about it. They had to get Fritzl to show them the entrance.
The children/grandchildren who lived with Fritzl and his wife on the top floor were taken from their mother as infants. Now aged 12, 14, and 16, they have no memory of her, or of the basement prison, or of their other three siblings, aged 5, 18, and 19. Fritzl apparently forced the 18-year-old Elisabeth to write one note claiming that she'd run away to join a religious cult; and others later, claiming that she'd given birth to babies for whom she couldn't care and asking her parents to look after them. Austrian social services granted legal guardianship to Fritzl and his wife, despite now-admitted concerns about the legality of doing so, given that mother wasn't available to grant permission.
This man sounds like a narcissistic sociopath of the first order. He's been married to his wife for 52 years, and my guess is that she is a very weak and malleable woman who was virtually beaten into submission decades ago. Fritzl bought all the extra food and clothing supplies outside of Amstetten, so no questions would be asked, and he surely handled all of the family finances, so his wife would not have seen any bills.
And, as a number of articles in various European media have pointed out today, Austria is a country with draconian privacy laws, a direct heritage from World War II, when people were forced to inform on one another. Today, the Austrians guard their privacy very jealously. If you see nothing of obvious concern, you are not going to look any closer.