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It was inevitable that the headline grabbing part of the deputy prime minister's sustainable communities package was the plan to build an additional 200,000 homes in four areas of the South-east. But for a government that's committed itself to regional regeneration and regional government, an awful lot is riding on its attempts to deal with housing market failure in the north of England and the Midlands. John Prescott announced an extra £500m over three years for the nine pathfinder areas, which account for about half of the estimated 1 million properties blighted by abandonment and low demand spread over 120 local authorities.

There is, of course, a real danger of falling into an easy stereotype of housing apartheid in England, with the South-east characterised by feverish housing demand, lack of supply and key worker shortage, and the North written off as locked into low demand, demographic decay and migration from the cities. There are parts of the South-east and London (Hackney or Hastings) with sustained economic crisis just as there are vigorous subregional economies in the North (Leeds, south Manchester and Cheshire). But, if the description of the Prescott programme as a plan to "concrete over the South and bulldoze the North" makes better rhetoric than analysis, it is not pure invention either: there will have to be big demolition programmes in the northern cities. Talk of the need for 15,000 demolitions in Liverpool, 9000 or so in east Lancashire and significant numbers in Hull have the ring of reality about them.

The pathfinder projects (Birmingham and Sandwell; east Lancashire; Humberside; Manchester and Salford; Merseyside; Newcastle and Gateshead; north Staffordshire; Oldham and Rochdale; and south Yorkshire) are welcome enough. But they raise a number of questions. The pathfinders address only part of the market place: the nine local authorities around Manchester, for example, form a single housing market, and local regeneration schemes, however ambitious, need to be developed within a broader economic and spatial strategy. But this itself has its dangers – some cities outside the pathfinder projects fear that pathfinder funding will attract other investment, public and private – to the detriment of the non-pathfinder areas, which will then be pushed further towards crisis. There are significant housing problems in Teesside, west Yorkshire and Cumbria. The fear of local authorities here is that areas that are slipping towards market failure will be dragged down further. They will depend on Housing Corporation main programmes together with the combination of transfer, arm's length management companies and PFIs for refurbishment and recovery. But the housing chief in one northern city commented: "What we need, quite simply, is some good, old-fashioned, ordinary slum-clearance funding."

What is lacking in the Prescott policy is a commitment to a hard-headed strategy to tackle structural problems in the North focused on some of the big cities that have key economic drivers – Leeds, Sheffield and the Manchester–Liverpool sub-region. "The programme is geared to the tackling of existing problems," one old regeneration hand opined. "Of course it is good to acknowledge that low demand is an issue. Of course it makes sense to try to manage the market better. But there is no real identification of and determination to pursue drivers of change like research and development capacity, universities and effective transport links. It is, at the end of the day, a plug-and-patch policy and the North–South divide will inevitably grow wider." In short, it is a housing policy not an economic policy.

The fear is that areas that are slipping towards market failure and have no pathfinder funding will be dragged down further