Homeowners to face higher insurance costs due to construction boom

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Homeowners are being told to prepare for big jumps in insurance payments, with soaring construction costs leaving experts warning households are at risk of being under-insured.

A shortage of labourers and building materials exacerbated by a surge in construction due to government grants have driven up prices during the coronavirus pandemic, with data showing house construction costs have risen almost 9 per cent to a record high over the past 12 months.

Surging costs for timber and other supplies will start to push up insurance premiums.Credit:AP/Rogelio V Solis

Timber, board and joinery costs were up 12.2 per cent on Australian Bureau of Statistics data while metal products lifted 8.8 per cent as aluminium window and door costs were boosted by rising international freight expenses and production shortages. Due to high demand for home building, the ABS said builders were able to pass these costs on to consumers.

These costs would have a knock-on effect for homeowners wanting to ensure their insurance would cover replacing their property, Compare The Market general insurance expert Stephen Zeller said.

“Prices today aren’t the same as they were a year ago, meaning consumers could potentially be under-insured,” Mr Zeller said.

Rising premiums could add to cost of living pressures, which are shaping up as a federal election battleground with petrol prices at record levels and borrowers bracing for interest rates rises.

“Labour shortages are another matter to consider. Even if consumers have adequate insurance to rebuild, a shortage of builders could mean the construction time is extended. When you review your policy it is worth considering whether it gives you adequate access to temporary accommodation,” he said.

Mr Zeller said many households had chosen to invest in their homes during the pandemic, including undertaking significant renovations. In some cases, he said engaging a valuer to provide a full assessment of the property’s rebuilding costs would be worthwhile.

“It’s especially important that home improvers review their insurance policies to reflect the added value and increased cost of a rebuild,” he said.

“With the rising cost of materials, it is quite possible that under-insurance is a big problem for many,” he said. “Anecdotally we know some premiums increases can be over $100.”

The CoreLogic measure of residential construction costs, the Cordell Construction Cost Index, shows a 3.8 per cent increase in the three months to September across the country. The consumer price index, which covers a range of goods and is a measure of broader inflation, increased 0.8 per cent over the same period.

The increase in construction costs is the biggest in more than 20 years and the largest market-driven increase on record, with the last rise in costs of this size due to the introduction of the GST. CoreLogic attributed the price rises to supply chain disruptions and increased construction activity, driven by a surge in demand from the property boom and government grants.

CommSec senior economist Ryan Felsman said construction activity would probably remain high over the next 12 to 18 months as builders worked through a backlog of HomeBuilder grant-fuelled projects. The federal government introduced the grants in June last year to help offset the coronavirus pandemic-induced downturn.

“Builders are reporting shortages for key materials, such as steel, timber, PVC pipes, electrical equipment, concrete, bricks and tiles – all driving up costs,” Mr Felsman said.

“Tradie shortages have emerged due to border closures with sub-contractor rates lifting, causing some construction delays.

“Supply chain issues and rising labour cost pressures are likely to persist into 2022 until skilled inbound migrant workers return and pandemic demand-supply frictions subside.”

The latest Seek employment report recorded a 7.5 per cent increase in jobs advertised in trades and services over October.

A spokeswoman for the Insurance Council of Australia said insurers often had no option but to provide a cash payment that would not fully cover the cost of replacing what had been damaged or destroyed due to policyholders not ensuring their cover was high enough.

“This leaves the policyholder to make up the difference or in some cases walking away from a property they cannot afford to rebuild,” she said.

While insurers provide online calculators to help estimate the sum to insure, she warned customers might not always accurately estimate the replacement value or choose to insure at a lower sum.

“This is particularly important as the cost of rebuilding increases because of supply chain constraints, labour shortages or activity in the building sector,” she said.

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