Cities are shaped not only by how many buildings they have, but also by what those buildings look and feel like. A new study suggests that architectural design is not just a cultural “extra” – it can generate measurable economic value for residents and neighborhoods.
In The Economics of Architecture, Gabriel M. Ahlfeldt, Elisabetta Pietrostefani, and Ailin Zhang ask a simple but important question: How much is distinctive architectural design worth, and does the market provide the socially optimal amount of it? In other words, if good design benefits many people, will private developers invest enough in it on their own?
The paper speaks to a growing challenge in urban policy. Many cities want to improve architectural quality, protect local character, and create attractive neighborhoods. At the same time, they face high housing demand and rising affordability pressures. This raises a practical question: Can design policies improve the built environment without making housing problems worse?
Why design is an economic issue
The starting point of the study is that architecture can create value in two ways. First, a well-designed building may be more desirable to live in or work in. This is a direct benefit that can show up in higher rents or sale prices.
Second, design can affect the surrounding area. A striking building can make a street or district more attractive, support local identity, or increase the appeal of nearby properties. Economists call this a spillover – an effect that benefits others who did not pay for it.
Spillovers matter because they create a potential mismatch between private incentives and public benefits. If a developer pays extra for design but cannot capture the full neighborhood benefit, they may choose a cheaper, more ordinary design. This is a classic case of underinvestment in a socially valuable feature.
A broad evidence base, brought together systematically
Rather than relying on a single city or a single dataset, the authors build their argument by synthesising evidence from many existing studies. They focus on research that estimates how “distinctive” architecture affects real estate prices and rents.
A key contribution of the paper is to separate two effects. The internal price effect captures how much more valuable the distinctive building itself becomes. The external price effect captures how much nearby properties gain when they are close to distinctive design.
This distinction matters for policy. If design only benefits the building owner, it is mainly a private choice. But if design also raises surrounding values, there is a stronger case for public intervention – because the benefits are shared.
What the paper finds: design premiums are real
Across the evidence reviewed, the authors find that distinctive architectural form is associated with meaningful price differences. Their preferred estimate suggests that distinctive design increases the value of the building itself by about 15% on average.
Importantly, the study also finds evidence for positive neighborhood effects. The external price effect – the boost to nearby property values – averages around 9%. This supports the view that architecture can act like a local public good: something that many people benefit from, even if they did not pay for it directly.
The paper also highlights that design improvements can come with higher costs. Based on available evidence, the authors work with an approximate figure of around 25% higher construction costs for distinctive design. This combination – higher costs but also broader benefits – is exactly what creates a potential policy problem.
From evidence to policy: a model of design externalities
To translate these insights into policy-relevant conclusions, the authors use a quantitative model of a stylised neighborhood. The model includes developers choosing between ordinary and distinctive buildings, residents with different preferences for design, and spillovers that decline with distance.
This framework allows the authors to test different policy tools in a consistent way. They examine policies commonly discussed in urban planning, including:
The goal is not to claim a one-size-fits-all solution. Instead, the model clarifies the trade-offs that planners face.
What works – and what can backfire
One clear message is that policies can increase distinctive design, but design policy is not automatically welfare-improving. Some tools raise architectural quality but reduce housing supply, which can push up rents.
The simulations suggest that a moderate subsidy for distinctive design can improve outcomes by encouraging developers to adopt design that generates spillovers. The authors find an “optimal” subsidy in their baseline scenario of around 10% of distinctive construction costs. The welfare gains are not enormous, but they are positive – and the logic is straightforward: the subsidy helps align private incentives with social benefits.
The paper is more cautious about policies that restrict supply. For example, limiting ordinary buildings in order to force more distinctive design can reduce total floor space and raise rents. The authors stress that this kind of approach can become inefficient and inequitable if it makes housing scarcer.
Design districts show a similar pattern. A small distinctive district can raise local spillovers and improve welfare, but large mandatory districts can backfire due to diminishing returns and negative supply effects.
Why this research matters
Architecture is often discussed in cultural terms, but this study shows it can be analysed with economic tools and real market evidence. The findings support a practical conclusion: good design creates shared value, and markets may not deliver enough of it without coordination or incentives.
At the same time, the paper offers an important warning for policy debates. Design rules that reduce housing supply can impose high costs on renters and worsen affordability. The most promising interventions are those that encourage better design while avoiding unnecessary supply constraints.
In a period when cities are trying to build more – and build better – this research provides a grounded framework for thinking about how architectural quality, neighborhood benefits, and housing affordability interact.
About the Authors
Professor of Econometrics at Humboldt University in Berlin, visiting professor at the London School of Economics, faculty of the Berlin School of Economics, and affiliate of the Center for Economic Performance, CESifo, and CEPR. His primary field is urban economics, but his research cuts across many fields such as environment, finance, labour, political economy, and real estate.
Lecturer and Assistant Professor in Geographic Data Scienceat the University of Liverpool, and Visiting Fellow at the Department of Geography and Environment at the London School of Economics. Her work studies urban development, heritage and conservation policy, and the political economy of the built environment.
PhD student at the London School of Economics. She is working on agglomeration economies and intergenerational mobility in China.
