Photo: for iStock
.
The benefits of distinctive urban architecture extend far beyond the buildings themselves, but the costs are borne by the developers. This can lead to underinvestment in high-quality design – and it raises the question of whether policy should encourage better architecture.
.
One reason that cities often lack distinctive architecture is that markets do not fully reward good design. Economic research shows that buildings with distinctive architecture sell for around 15% more than comparable buildings. Architectural quality also spills over to neighbouring properties, which gain roughly 9% in value from being near to well-designed new buildings.
But developers capture only part of these gains while bearing the full cost of better design. As a result, cities may end up with too few distinctive buildings.
To understand what policies might address this problem, it is useful to build an economic model of how developers choose designs and how residents value them, grounding the analysis in the evidence on price premiums and design spillovers.
Simulations based on such a framework suggest that encouraging better design could be of significant benefit to society as a whole. One estimate indicates that the welfare-maximising policy would resemble a subsidy of roughly 10% of construction costs for distinctive buildings.
What does economic research say about architecture?
Economists have long studied housing markets and urban development, but only recently has architectural design itself become a subject of systematic economic research. A growing body of work now examines how the design of buildings affects property markets, neighbourhoods and planning decisions.
One strand of research estimates how architectural quality is reflected in property prices. An early study shows that buildings with distinctive design can command higher prices than otherwise similar buildings (Vandell and Lane, 1989).
More recent research confirms that people are willing to pay for architectural quality. For example, studies that measure the perceived beauty of buildings – using ratings by residents or experts – find that more attractive buildings tend to sell for more.
A second strand of research looks at how architecture affects nearby properties. The design of a building matters not only for the people who live or work inside it. Distinctive architecture can shape the character of streets and neighbourhoods, making surrounding locations more attractive.
In London, for example, properties with a view of buildings rated as more beautiful command higher prices, indicating that people value architectural quality even when they do not occupy the building itself (Ahlfeldt and Holman, 2018). Similarly, a study of the Netherlands finds that protecting distinctive buildings can also raise the value of neighbouring properties (Koster and Rouwendal, 2016). Together, these findings suggest that architectural design generates local spillovers.
A third line of research focuses on how planning systems interact with architectural design. Some cities try to encourage distinctive buildings by offering incentives or regulatory flexibility. For example, in London, buildings designed by well-known architects are often allowed to be significantly taller than comparable developments (Cheshire and Dericks, 2020).
Together, these findings suggest that architecture generates economic value – but they also raise questions about whether markets alone will deliver the level of design quality that people value.
Why markets produce too few distinctive buildings
The evidence that architecture affects property values raises an obvious question: if people value distinctive design, why do cities produce so many ordinary buildings? Economic research points to a simple explanation. Developers decide how buildings look, but many of the benefits of good architecture extend beyond the building itself.
When a developer invests in distinctive design, tenants and buyers inside the building may be willing to pay more. But neighbours may also benefit from better surroundings, improved views and a more attractive street environment. Nearby property owners can therefore capture part of the gains created by architectural quality. Because developers cannot fully capture these wider benefits, they may have little incentive to invest in better design.
Economists describe this situation as a positive externality: the social value of architectural quality exceeds the private return to the developer who pays for it. Similar arguments are often used to justify public support for parks, clean air or other urban amenities that benefit many people.
This logic helps to explain why markets may produce too few distinctive buildings, even when residents value better architecture. Developers make rational decisions based on the incentives that they face, but those incentives do not reflect the full value that good design creates for the wider neighbourhood.
Bringing the evidence together in a quantitative model
While previous research has documented many of these effects, most studies focus on one piece of the puzzle at a time. Some measure how distinctive design affects the price of the building itself. Others estimate how architectural quality spills over to neighbouring properties. A smaller number of studies examine the costs of higher-quality design or the role of planning policies.
Taken together, this body of evidence shows that architecture creates measurable economic value – but it does not by itself tell us what might be the best policy response.
A recent study brings these strands of evidence together in a single framework (Ahlfeldt et al, 2026). This work synthesises dozens of empirical estimates of the value of architectural design and combines them with new evidence on how people value different styles of buildings.
These empirical patterns are then used to build a quantitative model of neighbourhood development that captures how developers choose between ordinary and distinctive designs, and how residents respond to those choices.
Because the model is designed to match the key patterns observed in the data – such as the price premium for distinctive buildings and the spillover effects on nearby properties – it can be used to explore how different policies would affect real-world cities. By simulating how developers and residents respond to changes in incentives, the model allows researchers to evaluate the potential effects of policies aimed at encouraging better architecture.
This makes it possible to move from documenting the value of architectural design to asking a more practical question: what kinds of policies could help cities to achieve more distinctive and attractive built environments, and would that be desirable?
Can policy encourage better architecture?
If markets produce too few distinctive buildings, the next question is whether policy can help to correct this imbalance. In principle, the solution is straightforward. When private incentives do not reflect the full social benefits of an activity, economists often recommend policies that encourage the activity until private and social returns are better aligned.
One direct approach would be to subsidise distinctive architectural design. A subsidy would reward developers for the broader benefits that their buildings create for neighbours and the surrounding area. In this sense, supporting architectural quality would resemble policies used to promote clean air and reduce carbon emissions (which constitute a negative externality), such as subsidising electric vehicles.
Cities sometimes use other tools to encourage better design. For example, planning authorities may grant additional development rights to projects with distinctive architecture. In London, buildings designed by well-known architects are often allowed to be substantially taller than comparable developments (Cheshire and Dericks, 2020). Such policies attempt to provide incentives for architectural quality indirectly by offering regulatory advantages.
Another approach is to designate areas where distinctive design is required or strongly encouraged. Historic districts and conservation areas are examples of policies that shape the character of neighbourhoods through planning rules.
While these policies can help to preserve architectural quality in certain locations, they can also have unintended consequences if applied too broadly. For example, if too many distinctive buildings are mandated in a particular district, developers may respond by opting for more ordinary designs in other parts of the city because demand for distinctive architecture has already been met. This could happen even where those other locations might be better suited to high-quality design.
Evaluating these different approaches requires understanding how developers respond to incentives and how architectural spillovers affect surrounding neighbourhoods. Quantitative models of urban development make it possible to compare these policies and assess which ones are most likely to improve the overall quality of the built environment.
What does this mean for urban policy?
The simulations from the quantitative model suggest a clear policy implication. Because developers capture only part of the benefits that are created by distinctive architecture, encouraging better design can increase overall social wellbeing.
In the model calibrated to the available evidence, the policy that performs best resembles a subsidy for distinctive architectural design. Specifically, the welfare-maximising subsidy is around 10% of construction costs for buildings with distinctive design.
Figure 1 illustrates this result, showing how welfare (benefits to society as a whole) changes as subsidies for distinctive architecture increase.
Figure 1: Welfare effects of a distinctive design subsidy
Source: Ahlfeldt et al (2026).
Note: The subsidy rate refers to the percentage of construction cost (excluding land) covered by the subsidy. The welfare effect is expressed in household-income-equivalent terms.
When subsidies are small, encouraging better design improves welfare because the additional architectural spillovers outweigh the costs. But the benefits do not increase indefinitely.
One reason is that tastes for architecture differ across residents. Distinctive buildings command a price premium partly because they are scarce and because some people strongly value living in them. As distinctive buildings become more common, the premium declines. More and more people end up living in buildings with distinctive design even though they do not particularly value it.
A second reason is that developers differ in their ability to deliver distinctive architecture efficiently. Some developers work closely with architects and they can create distinctive designs at relatively low cost. Others find it more expensive to do so. As subsidies increase, more developers are encouraged to adopt distinctive designs, including those who are less efficient at delivering them.
Because the subsidy must be financed, these additional costs matter. At low subsidy levels, the value created by better architecture exceeds the public resources spent. But as subsidies grow larger, the additional buildings encouraged by the policy generate less value while the fiscal cost continues to rise. In the simulations, welfare reaches its maximum when subsidies are around 10% of construction costs and begins to fall if subsidies increase further.
The broader lesson is that architectural design, much like other urban amenities, creates benefits that extend beyond individual buildings. Because these benefits are shared, markets alone may produce too little distinctive architecture. But policies designed to encourage better design also need to be carefully calibrated so that the public resources spent do not exceed the value that they create.
Where can I find more?
- The economics of architecture: A Centre for Economic Performance (CEP) discussion paper that reviews the research on this topic and develops the model discussed above.
- Distinctively different: a new approach to valuing architectural amenities: A VoxEU column that discusses how to estimate empirically the value of distinctive design.
- Turning houses into gold: An LSE blog post by Paul Cheshire describing the challenges of the UK’s planning system.
Who are experts on this question?
- Gabriel Ahlfeldt, Humboldt University& LSE
- Paul Cheshire, LSE
- Franz Fürst, University of Cambridge
- Thiess Lindenthal, University of Cambridge
- Hans Koster, VU Amsterdam
- Elisabetta Pietrostefani, University of Liverpool
- Ailin Zhang, LSE
Dmitry Pokidaev
You must be logged in to post a comment.