Vancouver's so-called Hobbit House has survived a rezoning application after a proposal to construct new townhouses around the fairy tale cottage was approved by city council.

The 84-year-old home on West King Edward was put up for sale last spring for $2.86 million, leaving heritage lovers worried that the iconic cottage will be torn down.

But developer David Mooney has now received the green light from city council to preserve and restore the 2,400 square-foot property.

In addition, the proposal from W.T. Leung Architects will rezone the property at 587 West King Edward to add more housing in a area that has been designed for higher density.

Two three-storey-townhouses will now be built around the house, which is officially referred to as the James Residence, with another 18 townhouses on the redeveloped property and parking space.

Michael Kluckner, a member of the city's heritage commission, says the house was worth preserving.

"It's one of those instantly recognizable, most heart-warming houses in Vancouver that everyone seems to know about," Kluckner said.

"It looks like a children's drawing of a house, something out of a fairy tale. It tells a story about Vancouver."

The house was originally built in 1942 for CNR foreman William H. James and was known by the family as an "Ann Hathaway" house for the cottage style in Stratford upon Avon where William Shakespeare's wife grew up.

Kluckner said the decision to preserve the house while allowing development around it gives a signal to the developer community that they can work with heritage conservationists, make money and put back an element of public development.

"They can be part of a new Vancouver without erasing the old Vancouver," he said.

With files from Terry Donnelly