Why does the cost of building a new home threaten the security of existing cover?
The simplest way to discuss this is to not think of it as a cover based on what you paid to build or buy your home – but rather cover against the amount it would cost to replace and rebuild.
Theoretically, if a person was to buy a house for $50,000 and then renovate to the tune of $200,000 - then that house is no longer worth $50,000. If someone was to copy that renovated house directly it would cost them something like $250,000 – and that is the number your insurance needs to cover you for.
This is a simple enough scenario to think about when the value increasing factor is a significant renovation, but when it’s the market driving the value up it is more complicated to think about.
Especially in a market where the huge increases in property values are occurring over a short time span – even as short as six months – it can be difficult for homeowners to maintain adequate cover. This is due to material shortages and other supply costs, which make for a volatile property value.
How much are building prices increasing in New Zealand?
Builders have reported that brickwork costs have increased over 20% in just eight weeks while cladding has gone up 50% and steel up 60% in the last few months. This is a trend across the board for locally sourced materials - the cost of importing these materials is even higher.
These increases in costs are not only due to the pandemic and the import problems it has created but also due to increasing demand from Kiwis looking to build and renovate – which in turn puts pressure on supply lines and drives the prices up.
While these numbers primarily reflect material costs, the inability to employ migrant workers thanks to the pandemic has also had a severe impact on the construction industry’s ability to meet demand.
What can homeowners do to protect themselves and their investment?
Getting advice on rebuilding costs needs to be done regularly in order to keep your cover up to date, but insurers may not be equipped to make such regular changes to your scheduled value so it is essential to discuss this with your provider.
With homeowners happily living in their homes - unaware and unconcerned with the skyrocketing value of properties in their area - they could be one mishap away from being so under-insured that an insurance pay out secured less than a year ago may not cover a rebuild.
Getting a quote from a builder and comparing it to the advice from your insurer is one step homeowners can take to make sure they are adequately covered. Considering wider costs such as consents, demolition, removal, additional material prices as well as the intrinsic value of your home is another. The third step you can take to ensure you are sufficiently insured against accidental damage is to continue monitoring the market in your area and making sure that your policy is up to date.