Marked by distinction

Often in planning and architecture we have a gut feeling that amenities like design, heritage and greenspace matter in the creation of desirable, well-functioning neighbourhoods. We cling to this idea because it ‘feels right’ or in our experience it seems to work, but hard evidence that design adds value has always been elusive. What makes the findings of our most recent research exciting is that our estimate of the capitalisation effect for distinctive architecture is based on a quantitative metric and comes closer to a causal interpretation than previous studies. In fact, for each step on a five-point scale, ranging from not-at-all-distinctive to very distinctive, we find residential property prices change by £38,700. This is a substantial effect, even if within neighbourhoods our index typically does not vary by more than one step.

Why is this important? In terms of economic theory architectural beauty can be considered a local public good – no one can be denied the pleasure of looking at an appealing building and that appeal does not deteriorate as people enjoy it. This means that private investments in architectural beauty will be suboptimal and not take into account benefits to neighbours and passers-by. This is why governments usually use planning regulation to enforce heritage preservation policies to correct for any market failures. However, the rationale for these policies, at least to some extent, rests with the assumption that an architectural externality exists. Until now there has been limited quantitative evidence to back up this claim, and given the restrictive nature of heritage planning and the economic costs placed on owners, our new quantitative evidence can help justify these policies in economic terms.

So, how did we go about measuring the architectural premium associated with distinctive architecture? We studied 47 conservation areas in London, examining 7,900 property transactions and drawing on interview data from more than 500 residents. To assess the economic value of an aesthetically pleasing built environment we used a double-differencing approach – a statistical technique that allows us to mimic experimental research design using observational study data and then estimate the effect of a treatment (in this case enjoying distinctive architecture).

In the first stage we computed the changes in a design measure and our economic outcome measure (observed property transaction prices) on either side of the defined spatial boundaries of a number of neighbourhoods. We chose conservation area boundaries because these are drawn to separate, architecturally distinctive, areas.

In the second stage we compared the differences between neighbourhoods. The first stage removes features that are similar within small neighbourhoods – for example accessibility to the city centre, transport infrastructures, natural amenities or good schools. The second stage removes all features that differ systematically across conservation areas and other parts of the same neighbourhoods (for example the effects of a generally tighter planning control).

It was relatively straightforward to record the differences in property prices from one conservation area to another. We used standard statistical techniques (hedonic modelling and regression discontinuity design) to control for non-design-related characteristics. To measure the spatial differences in design character we had to go a step further and collect original data. We conducted quantitative interviews, asking residents to rank the distinctiveness of the conservation area they lived in relative to nearby areas. The questions were asked in such a way that the responses could be aggregated to quantitative indices that could be matched to the spatially differentiated property prices. We also collected wide range of individual characteristics and created an index of relative design quality that is adjusted for interviewee characteristics.

The baseline capitalisation of £38,700 per one-step increase in our distinctiveness index corresponds to 25.4% in 2003 prices. This reflects the benefits of occupying a distinctive building near other such buildings. We also wanted to measure separately the effects of being close to other distinctive buildings because these are the benefits not usually accounted for by free economic markets. To do this we looked at the prices of those buildings in a conservation area least likely to be characterised by special design quality. We assumed that buildings constructed after 1945 and before the designation of a conservation area did not have the design characteristics that led to designation, even if they were in a conservation area. Moreover, these buildings are not affected by the additional planning control that comes with. We also compared properties located just outside conservation areas with and without a view of their buildings.

In both cases our results are similar to the baseline capitalisation effect, suggesting that positive external effects of distinctive architecture do exist and are quantitatively relevant. Yet our results may be an underestimate of the economic value of design quality, as we excluded potential benefits to people living further away and visiting the areas. These findings imply that planning policies that encourage the market to co-ordinate the exterior of buildings could deliver sizable economic benefits.

Does this mean that the only value to heritage and design is an economic one? We would argue not, preferring to see this as one piece of evidence that can help support policies designed to preserve, maintain and promote good design.

Gabriel M Ahlfeldt is associate professor of urban economics and land development and Nancy Holman is associate professor of urban planning, both at the London School of Economics

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