Are North, South, East and West, when used as directions always capitalized?
No. They are only capitalized when they are used as locations.
Drive west on Sunset to the sea, then turn north until you reach the mountains.
I'd rather live in the South than the North.
By the way:
I'd rather live in the South than in the North. (Paralell strcuture)
I'd rather live in the South than in the North
If you say, "I prefer to walk rather than driving," that is faulty parallelism. It should be changed to: "I prefer walking rather than driving."
Collins Cobuild, again:
If you prefer one person or thing to another, you like the first one better.
I prefer Barber to his deputy.
I prefer it to more expensive machines.
Note that you do not use any preposition except `to' in sentences like these.
(c) HarperCollins Publishers.
In the above example, the element that comes after the verb phrase and before "than" is a prepositional phrase. It follows therefore that a prepositional phrase must also come after "than".