Escalation of Building Costs Results in Domestic and Commercial Properties Being Underinsured

The latest Rider Levett Bucknall report says that a backlog in construction projects due to the national health crisis will cause a sluggish year for construction in general. The report points out that levels of construction activity (whether high or low) always affect the prices of labour and materials. These elements together will have a bearing on construction inflation.

Commercial building inflation hit 5% in 2018 and 2019, but then fell to 4.4% and then 3.8% by the first quarter of 2020. During the covid crisis, numerous construction projects were halted altogether, while others slowed a great deal.

Residential fared even worse. For six years, from 2013 to 2018, construction inflation in residential projects hit a high of 5.5%. Finally, in 2018, it began to fall reaching 3.6% in 2019. No one is quite certain at the moment how the future of construction will be affected by covid19—only that it will be affected, most likely in negative ways.

Both sectors have stalled out and have a backlog of projects but are expected to start back up soon. This year has been one of the most unusual on record with residential and commercial construction volume declining to its lowest in 10 years. With the covid crisis now managed, all commerce and industry is expected to return to normal but this may take more time than some experts have predicted.

With all these unprecedented changes in construction, one area that has been inadvertently affected in the insurance industry. Thousands of owners now find that they are underinsured. That could result in a financial crisis if the home or building is damaged or destroyed.

The chart below shows real examples of how this works:

Square metres (m²)	Sum Insured on policy schedule	Actual cost to rebuild main dwelling*	Actual cost to rebuild main dwelling/m²*	Shortfall if loss due to natural disaster	Company premium increase for correct Sum Insured (CP)
354	$824,000	$1,095,157.54	$3,093.67	$271,157.54	$118.96
228	$649,606	$1,097,644.82	$4,814.23	$448,038.82	$172.83
54	$162,000	$202,438.31	$3,748.86	$40,438.31	$3.10
300	$787,500	$845,518.23	$2,818.39	$58,018.23	$15.63
51 + 18	$155,985	$243,766.36	$4,779.73	$87,781.36	$47.73
464 + 36	$1,358,750	$2,288,813.58	$4,932.79	$930,063.58	$354.07

How rebuild costs are influenced

A number of factors can influence the cost to rebuild once a home is destroyed. And with natural disasters on the rise around the world, this is not a far-fetched idea. As mentioned above, the covid crisis has led to overall price jumps in labour and materials. The ongoing tariff war between China and the U.S. has also resulted in higher prices for construction materials.

How much insurance do you need now?

In the past, it was believed that for the standard New Zealand home, $3,000 per square metre was adequate. With all these factors in play now, many insurance industry experts are warning that this is no longer enough to protect the investment of homeowners and commercial property owners. Rebuild costs are gradually rising and no one knows exactly where or when that will conclude. Factors that can influence rebuild costs include:

Higher material and labour costs
Property located in a remote area with limited resources
The presence of asbestos
Property built in areas with poor access

Final Thoughts

As the world moves forward, most of our lives will return to normal in the days ahead. But a sudden tragic event such as a fire, flood or natural disaster can leave property owners without the funds to rebuild. For these reasons, insurance experts believe it’s important to reassess all insurance at this time. Consider all factors. Make sure you’re adequately covered for any event so your investment is protected.