What the local government should offer to do is purchase one or two of the homes and renovate them into spaces for businesses, with all of the usual 'ye-olde Beijing' trappings. That way these streets can maintain a controlled number of shops and utilities, meeting the wants of the older residents and the needs of the younger residents.
I do think the one picture showing the removed second floor does look better, and the rebuilt entrance is excellent. Those are good examples of renovations, as opposed to just bricking up windows and plastering grey faux-brick facades over.















