Just like everywhere there are places that people would rather live. It is generally thought that anything North of the Highway (ie North Katoomba) is not such a great idea. It has a lot of newer, more depressed housing. There are some nice spots but having lived there for five years myself I certainly wouldn't choose to raise my kids there.
So stick to the South side of the Highway and just look around at the neighbours. Around Darley Street there is a lot of Housing Commission but some really beautiful houses too.