Rising home values can mean rising replacement costs: is your insurance affected?

CoreLogic's latest figures signal a continued upward trajectory for house prices, with the national Home Value Index climbing by 0.6% in February, marking the most significant leap since last October. 

This growth has been widespread, touching both cities and regional areas alike. Interestingly, Hobart stands out as the sole exception in this trend, with every other capital city witnessing increases—Perth notably leading the charge with an impressive 1.8% rise.

A timely reminder to check your insurance

As house prices go up, it’s easy to get caught up in the excitement of how much your home is worth on the open market. But it’s also a good time to consider your house’s replacement cost. This is the amount you’re insured for on your home insurance policy, and it takes into account all the expenses related to building you a new home from scratch - like construction costs, materials and labour.Your home’s market value and its replacement value are different figures, so it’s possible that recent increases in market value haven’t affected the replacement value at all. 

But sometimes they are correlated, especially in robust markets with high demand for housing and materials. Here are some other situations that can affect your home’s replacement value:

• Independent increases in construction costs. Replacement costs can also rise independently of the housing market's performance, influenced by fluctuations in the prices of materials, labour or both.
  
• Home renovations and extensions. Any improvements made to your home, from minor renovations to major extensions, can significantly increase its replacement cost by adding value and potentially complicating the rebuild.
  
• Updates in building codes and material costs. Changes in building standards, regulations, or the introduction of more costly materials can further elevate the cost of rebuilding your home to its current standard.

It's always a smart move to double-check your replacement costs against your insurance coverage, especially if it's been some time since your last review. Now is the perfect moment to ensure everything's up to date.

The risk of underinsurance

So, why is this important? When your insured amount falls below your replacement costs, it’s called being underinsured. This means your insurance coverage might not be enough to cover the cost of rebuilding your home in case of damage or loss. This could leave you in a tough spot, needing to cover the difference out of pocket. That's why keeping your policy aligned with the current replacement cost of your home is not just smart—it's essential.

Estimating your home’s replacement cost

To get a ballpark figure of your home’s replacement cost, you can start with something pretty straightforward. Look up the average construction cost per square metre in your area—this info is usually just a quick online search away. Then, multiply that by the square metre of your home to get a rough estimate.

For those looking for a more detailed analysis, there’s the 'actual cash value method'. This method digs deeper, considering the specifics like materials, labour and any unique features of your home, offering a more tailored estimate. It’s a bit complex and definitely something a professional valuator is best equipped to handle.

If your digging leads you to believe you might be underinsured, don’t wait around. Updating your insurance to reflect your home’s true replacement cost is a smart step towards protecting your growing investment.

Need a little help finding the right home insurance for your needs? Check out some of the following insurance providers as vetted by Mozo.