Given the fanfare that greeted the launch of Liverpool as European Capital of Culture 2008, you might be forgiven for thinking that the North is on a bit of a roll - and not only because Ringo Starr played the drums at the opening night last Friday.

The housing market, however, tells a slightly different story. The oversupply of new-build apartments in northern city centres - including 15,000 unoccupied flats in Liverpool alone, according to one agent - has contributed to a forecast of static growth for new homes. But the glut of apartments is not the only thing that developers and investors should be worried about, says Julian D'Arcy, chairman and head of residential for Knight Frank estate agents in the North of England.

“The design and quality of schemes, location, rising build costs and increased costs of finance will all be under scrutiny in 2008,” he cautions, as Knight Frank launches Raising the Game, its latest report into the northern residential market.

However, the issue of oversupply continues to dominate the debate. In April housing analysts claimed that up to 35 per cent of the apartments in the city centre of Liverpool were empty. In September a report by Dr Rachael Unsworth, of the University of Leeds, commissioned by the Yorkshire developer K.W.Linfoot and the estate agent Morgans City Living, said that in Leeds “at current levels of occupier demand it is unlikely that all of the 20,000 units at various stages in the development process could be absorbed”. In December, Alastair Stewart, an analyst with Dresdner Kleinwort, said: “A thousand flats lie empty in Leeds and in some cases are being sold for £100,000 less than what was paid for them.” Stewart also mentioned large numbers of empty flats in Manchester, Ipswich, Norwich, Leicester, Nottingham and Birmingham.

The northern residential market has undergone an enormous expansion of apartment building during the past decade. A report for Manchester City Council found that, between 2003 and 2006, 81 per cent of all planning permissions granted were for flats.

According to D'Arcy, oversupply is not about numbers. “There is an oversupply in Leeds - an oversupply of unsuitable and uninspiring units,” he says. “And there is also an undersupply of interesting schemes that will take the market forwards.” Raising the Game gives warning that “the new-homes market across the main northern cities will see static growth in 2008 whilst family homes and iconic build will perform more strongly, achieving 4-5 per cent annual price growth.”

The industry is splitting into two distinct “oversupply” camps: the “scaremongers”, as D'Arcy calls them, and those who continue to put a positive spin on the situation, such as the developer Kevin Linfoot, the chairman of KWLinfoot. Linfoot's latest project is Lumiere, a 54-storey residential and mixed-use tower in central Leeds. At the beginning of December he revealed that he plans to build another tower of 400 apartments in the city centre next year, and to submit an application for 1,400 key-worker apartments at two further sites. “As far as I am concerned, everything that is in the heart of the city centre is doing well and there is a demand from owner-occupiers and tenants,” he said.

Lee Dribben, chairman of the Residential Landlords Association, maintains that the large choice of city-centre flats has led to a hyper-competitive renters' market, which is not benefiting investors. “There are so many flats available in some areas that rents are falling so low that professional landlords are having to consider their options,” he says.

However, in one city - Newcastle - Raising the Game sees an undersupply. It points to the growing disparity between densely regenerated cities, such as Manchester, and cities such as Newcastle, where the relatively small size of the centre, and the high proportion of listed buildings and conservation areas, is limiting development. Between April and October last year, planning permission was granted for just 46 flats in Newcastle city centre.

The wider fear, echoed in Raising the Game, is that perceptions about an oversupplied regional market, and the tightening financial climate, will stall regeneration outside the major northern cities. Bradford has had an especially beleaguered year, characterised by a lack of confidence in the property and regeneration sector. In November an application for Heritage Lottery funding to start Will Alsop's already scaled-back plans for a £30 million city-centre park failed. And in December even the Bishop of Bradford weighed in to criticise the developer Westfield for its slow start on the Broadway shopping centre.

The long view is that market conditions will eventually sort out the supposed oversupply. Raising the Game says that the credit crunch reveals a “weakness in the UK development model, namely a reliance on cheap and relatively easy credit”. The reversal of this, plus a predicted increase of 6 per cent per annum over the next four years in construction costs, and industry fears about the cost of incorporating government directives on eco-efficient measures into all new-builds by 2013, are contributing to a fear of city-centre slowdown as the new year dawns. All eyes are on the full-year figures due at the end of February from the major northern housebuilder, the Persimmon Group.

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