Should I extend my house upward or knock down and build from scratch?
I've thought about doing the same thing (adding on an upstairs to my house).  One of the simple problems is permits; the inspection offices want to deal with things they know, and building above an unknown.

Basically, your support comes from below; the new floor rests on the floor below, and the floors below on the foundation.  If you need stronger walls, you need to start tearing things out (eg, drywall) so you can bulk them up, and you can't just add new load-bearings walls without putting some sort of footing in below them; that's near impossible in most construction.

There are typically tables of how much load a room has to be able to support in a given area; 30lb per square foot is pretty typical, but you have to remember that an unevenly loaded area often requires heavier duty walls to deal with the torsional and lateral forces.

I still haven't given up on putting a second floor on my house, but I know that to be able to do it, I'm likely going to have to strip the walls back to see what there is, which means either from the inside (plaster walls) or outside (wood siding), either of which is going to suck to replace.