The ability to instruct effectively is more determined by personality than anything else - the best pilot in the world may make a lousy instructor because he cannot empathise with his student.
However, the excuse for using low time pilots to teach others is a poor one and hides behind the economic reality that it is a cheap way to hours build. Some student will get reasonable instruction but many will get an inexperienced pilot who is also an inexperienced instructor - this is not a good mix and may explain some of the many training crashes and incidents.
I know that someone is going to come back and say that all instructors pass an approved course but, speaking as one who has taught the British military instructors course (reckoned to be the best in the world), a brand new instructor neds constant supervision and post graduate training if he is to become a good instructor.
In the Military fixed wing world, good pilots are often 'creamed off' from training and sent on instructor courses before being put back into the training system - some are good but some have very poor attitudes because they find flying easy and can't understand why the student doesn't.
This is not done in the RW world and potential instructors must have completed (as mentioned in a previous post) at least one operational tour - they will have circa 1000 hours total (don't forget to add their hours from training to their operational flying) which I consider to be a minimum requirement.