Nargott
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To be honest, even if there weren't any technical issues (it's unclear if it's feasible while preserving upgrades) and there weren't +2 to the city level, my attitude would still be negative towards this particular approach.
Because it provides too much flexibility right away, devalues further development in the form of upgrading (reaching the upgrade technology), and doesn't contribute to preserving the overall basic "style" (color) of the troops.
Additional bonuses like +1 morale for matching a single color are also bad, as they effectively penalize any attempt to mix colors by removing this bonus, instead of freely allowing mixing in areas where an improved dwelling has been built for that purpose.