The county town scored highly in the latest annual survey by property website Rightmove, which scores areas based on their amenities, sense of community, and leisure opportunities.
But Shrewsbury was bettered by Llandrindod Wells, over the border, which took fourth place in the survey.
Top spot went to the Cornish seaside resort of St Ives, followed by Skipton in Yorkshire, which took second place.
Leamington Spa, in third place, was the West Midlands top town, with Stratford-upon-Avon coming seventh.
Deputy Mayor of Shrewsbury, Councillor Julian Dean, echoed the findings of the survey, although he voiced concerns that future development could affect the town's character.
"At the moment it's special because the size of it means that for pretty much everybody the town is a nice easy place to go to," he said.
"It's a great town centre, with lots of independent shops, fantastic parks, and the river, which makes it really attractive."
But he said there was a risk of losing some of the town's unique character with increased development.
"The fact we are in a beautiful county also helps, being surrounded by some quite incredible countryside," Councillor Dean added.
He said that the town also had a thriving arts and live music scene, catering for all ages.
"Lots of pubs, when they are open, offer live music," he said.
"You've got everything from Albert's Shed, which provides music for young people, to some of the open mic places that older blokes with guitars go to play. There are also lots of very good places to eat and drink."
The Rightmove survey, now in its ninth year, ranks towns and cities across 10 different categories, ranging from how friendly the neighbours were and the quality of local services, to the sense of belonging and the quality of nature and green spaces in the area.
Llandrindod Wells was named the happiest place to live in Wales, and also returned the highest score across Great Britain for residents feeling 'able to be themselves'.
Rightmove's Tim Bannister said that for many people lockdown had given them an opportunity to learn more about their area.
He said: “Our latest research shows that despite all the challenges that this year has brought, many people have been able to reconnect with their local area and community which has had a positive effect on how they feel about where they live.
“Overall, I think lockdown has enabled people to rediscover what’s on their doorstep, and spending more time in their local areas has made people value their surroundings and communities so much more."
Mr Bannister said this year’s study showed a greater appreciation for green spaces and nature.
He said there was a strong link between people living in coastal and rural areas and how happy they were.
“Since lockdown we’ve since a trend towards more people looking to live in smaller communities," said Mr Bannister.
“Obviously for many people this year has not been a happy one, so we wanted to use our report to shine a light on the happiest places only, and to find out how lockdown has changed how people feel about where they live.”