Construction costs and inflation – the impact on insurance

We all know factors like vacancy rates, rent prices, interest rates and other trends directly impact the investment property market. But you may not realise these can also affect landlord insurance. Let us explain…

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.

‘How?’, you ask. Good question. Over the next few months, we are going to look at some recent data and what it means for insurance cover.

First up – construction costs and 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 11.9 per cent 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 7.3 per cent 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 42.1 per cent. Other metal products like garage doors, aluminium windows, guttering, taps and valves were up 16.2 per cent. Timber, board and joinery, including windows and doors, increased 20.6 per cent. Glass and mirrors were up 14.1 per cent. Plumbing products by 11.5 per cent. Installed gas and electric appliance cost 2.8 per cent more. Electrical equipment including switchboards, cables and conduit rose 13.9 per cent. Ceramic products including clay bricks and ceramic tiles rose 12.6 per cent. Concrete, cement and sand prices were up 3.4%. And cement products like concrete tiles and fibrous cement cost 7.1 per cent 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 per cent over the September 2022 quarter).

Inflationary pressures are also mounting – in fact, the annual CPI movement of 7.8 per cent is the highest since 1990. Both housing (10.7 per cent) and furnishings, household equipment and services (8.4 per cent) 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 and 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.

If you have any questions about your sum insured, the EBM RentCover team can help. Give the friendly team a call on 1800 661 662.

*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are here, contact 1800 661 662 if you have any questions.