New research puts a price on beautiful architecture – and it is a high one. A study of London property transactions by Gabriel Ahlfeldt and Nancy Holman, published in the February 2018 issue of the Economic Journal, is able to calculate the economic value of occupying a distinctive building in a location near to other distinctive buildings.

The researchers note that frequently in planning and architecture, we have a gut level feeling that amenities such as design, heritage and green space 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 this study exciting is that the authors'' estimate of the capitalisation effect for distinctive architecture is based on a quantitative metric and comes closer to a causal interpretation than previous research. In fact, for every one-step increase on a five-point scale ranging from not-at-all-distinctive to very distinctive, the study finds an increase in residential property price of £38,700. This is a substantial effect.

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 the building''s appeal does not deteriorate as people enjoy the view. This means that private investments in architectural beauty will be sub-optimal and not take account of the benefits to neighbours and passers-by.

That is why governments have frequently relied on planning regulation to enforce heritage preservation policies to correct for any market failures that may occur. But the rationale for these policies, at least to some extent, rests with the assumption that there is an architectural externality.

Until now, there has been limited quantitative evidence to support this claim. Given the restrictive nature of heritage planning and the economic costs placed on owners, the new quantitative evidence in this study helps to justify these policies in economic terms.

So how do the researchers go about measuring the premium associated with distinctive architecture? They focus on 47 conservation areas in London, examining 7,900 property transactions and drawing on interview data from more than 500 residents of these neighbourhoods.

To assess the economic value of an aesthetically pleasing built environment, the researchers use a statistical technique that makes it possible to mimic experimental research design. They compute how an economic outcome measure (observed property transaction prices) and a design measure change as one crosses defined spatial boundaries in a number of neighbourhoods. They focus on conservation area boundaries because these are drawn to separate architecturally distinctive areas.

The baseline capitalisation effect of £38,700 for a one step increase in their distinctiveness index corresponds to 25.4% in 2003 prices. This effect reflects the benefits of occupying a distinctive building and a property location near to other distinctive buildings.

The researchers also measure the effects of being located close to other distinctive buildings exclusively (excluding the effects of occupying a distinctive building) because these are the benefits that are potentially not accounted for by free markets.

To get to these effects, they look at prices of those buildings in conservation areas, which are least likely to be characterised by special design quality. They also compare properties located just outside conservation areas with and without a view of buildings inside a conservation area. In both cases, the results are similar to the baseline capitalisation effect, suggesting that there are positive external effects of distinctive architecture and they are quantitatively relevant.

Does this mean that the only value to heritage and design is an economic one? The researchers would argue against this position, preferring instead to see their study as one piece of evidence that can help support policies designed to preserve, maintain and promote good design.

''Distinctively Different: A New Approach to Valuing Architectural Amenities'' by Gabriel Ahlfeldt and Nancy Holman is published in the February 2018 issue of the Economic Journal. Gabriel Ahlfeldt and Nancy Holman are at the London School of Economics.