How increasing building costs could mean you’re now underinsured
Most people are aware inflation has been on the rise in recent months due to COVID-19 impacts. However, many are not aware of how significant the impact has been on the construction sector and what that means for their property insurance. As a result, the gap between what most people are insuring their properties for and the true cost of rebuilding is currently unusually large. Read on to learn more.
Shortage of building materials
The construction sector depends upon accessing the building materials it needs to grow. One of the most obvious impacts of COVID-19 on the sector has been the disruption to building material imports, particularly from China. It’s hardly surprising given the number of factories that were shut down during the height of the pandemic around the world. And many of these factories have been playing catch up ever since. The implications for the construction sector are clear: prices of key building materials like timber and steel have been rising significantly (often by 15-20%), whilst the supply of a number of materials (particularly timber) has become constrained. As a result, the cost of building a new Australian home has risen by 5-15% already, and is on track to continue rising.
Cost inflation is a theme across the board in the construction sector. Australian inflation expectations are currently running at 3.7% which is an unusually high number. Behind it, are a number of significant cost rises the construction industry has to bear. For example, wages have been on the rise in the construction sector in recent months due to the build-up in demand, which is currently playing out. A number of builders have mentioned this as a growing issue, along with the challenge of retaining key staff. These are the signs of a market experiencing strong cost pressures.
How this could affect your sum insured
Most owners realise that the sum insured on their property is based upon a realistic replacement value. So the implications of rising building costs for property owners are significant, as the real cost to rebuild is increasing. In fact, the true rebuild costs are generally much higher than most people realise, which means many are underinsured right now. For example, a typical four-bedroom house may currently be insured for $500,000, which may have been a fair price to rebuild it a year ago. However, with the above-mentioned increase in build costs, the real rebuild cost may now be closer to $600,000. That’s a significant under-insurance gap, which could create a nasty surprise for those property owners in the event they need to call upon their insurance for a pay-out in the future. It’s a significant and growing risk.
Hopefully, none of us need to call upon our insurance to rebuild our homes, but the whole point of insurance is to ensure you are covered in that worst-case scenario. We can help you make sure your insurance reflects a fair cost of rebuild, and to update it to a fair number if you’re under-insured. It’s a sensible move which will provide you with peace of mind.