Knights, mermaids, imaginary worlds, and talking ponies right? Yes, but also, tea parties, dress-up, house and puppet plays. (My personal bizarre grew-up-in-Alberta fantasy play was "Ukrainian Settlers," complete with babushkas, garden tools and baskets of imaginary potatoes).
Fantasy play allows children to safely play with, and thus, understand, social roles, emotions, and the rules of society, all the while allowing for imagination, expression and experimentation. (Yes, all of that is accomplished through playing house and pirate ship). Though it's typically (and sadly) the first to be underrated and labelled as "just play," it's an incredibly important part of social and emotional development and a necessary part of childhood. And besides that? It's just fun.
Break out the dollhouse/space station/barn/zoo, fold a newspaper hat, wave a wand, and enjoy the knowledge that while your kids are "just playing," they're developing far more than far off lands.