A proposal to build 400 new homes on land opposite Sainsbury’s in Central Milton Keynes was rejected by the council’s Development Control Committee at a meeting on Thursday night.
The development, which had been recommended to be approved by the council, was defeated by a majority vote.
The reason given for the rejection was poor design quality for a prime site within the city centre.
Linda Inoki, leader of campaign group Xplain, said: “This was a surprise rejection but the decision was clear, with six against and only one for the proposal.
“It is a poor design for the gateway to Milton Keynes, I can only describe the buildings as looking like army barracks.
“If we have to have housing on this site, we want it to be something that we can be proud of.”