Construction Costs & Inflation – the Impact on Insurance

There’s no shortage of news articles and data about Australian property. While providing a snapshot about the investment market, these figures also underscore potential impacts on landlord insurance.

First up – Construction Costs & Inflation.

Unless you’re building an investment property, you may think that construction costs aren’t of much concern. But you’d be mistaken. Let’s explore…

The Stats

According to CoreLogic’s Cordell Construction Cost Index, construction costs rose 12% over the 2022 calendar year – the largest annual increase on record (excluding the period impacted by the introduction of the GST). The figure was significantly higher than the 7% recorded the previous year.

Figures from the Housing Industry Association showed the cost of building materials rose dramatically in 2022. The cost of steel products, including beams and sections and reinforcing steel, rose 42%. Other metal products like garage doors, aluminium windows, guttering, taps and valves were up 16%. Timber, board & joinery, including windows and doors, increased 20%. Glass and mirrors were up 14%. Plumbing products by 11%. Installed gas and electric appliance cost 3% more. Electrical equipment including switchboards, cables and conduit rose 14%. Ceramic products including clay bricks and ceramic tiles rose 12%. Concrete, cement and sand prices were up 3.4%. And cement products like concrete tiles and fibrous cement cost 7% more.

Then there’s the extra cost for tradies – the Housing Industry Association’s Trades Availability Index shows there is a severe shortage of skilled trades, which is pushing up wages (up 10.4% over the September 2022 quarter).

Inflationary pressures are also mounting – in fact, the annual CPI movement of 7.8% is the highest since 1990. Both housing (10.7%) and furnishings, household equipment and services (8%) were major contributors to the annual rise.

The Bottom Line

In a nutshell, it’s costing a lot more to build and furnish homes. And not just new homes – the costs also apply to re-building. This is where these construction and inflation figures can impact your investment property – if you need to have repairs made, replace lost or destroyed contents, or rebuild the property.

The Impact on Insurance

The increased cost of materials & labour is making the cost to repair and reinstate buildings skyrocket.

This increase in cost directly affects a property’s sum insured. The sum insured needs to cover the true cost to rebuild the property and, with prices rising rapidly, it is easy for owners to find themselves underinsured. To reduce the risk of underinsurance, landlords should regularly review the sum insured for their property and update their policy to reflect current costs.

Inflation also means it’s important for landlords to check that the insured limits in their policy for contents are also adequate, as the cost to replace or repair damaged or lost goods (such as appliances, furniture, floor and window coverings) will be higher.  

The Takeaway

To ensure that your investment property is properly covered by insurance, be sure to check that the sums insured are enough to cover the real cost of replacing the building and its contents. With construction costs and inflation rising rapidly, it’s easy for sums insured to become out-of-date quickly, increasing the risk that you will not have enough money to reinstate your property should it be damaged or destroyed.

Your landlord insurance provider will generally automatically increase the sums insured at renewal time. While insurers do this to account for the erosion in the value of the sums insured due to inflation, the level of the increase may not be enough to cover the true increase in costs. It’s up to the policyholder (not the insurer) to make sure that the sums insured are adequate.

You should review your sums insured at least once a year, at renewal time or as soon as any upgrades (e.g. extensions, additions, renovations, modifications) are made at the property.