Avoid under insuring your home in a weak market

The market value of a property does not represent the cost of rebuilding and may be considerably more or less depending on housing market supply and demand.

As such, homes must be insured for the cost of rebuilding all structures entirely from scratch.

So, “if you are insuring at market value, the cost of buying or selling the property, you are insuring incorrectly” says Shirley Burger, National Head of Claims, Alexander Forbes Insurance.

Generally, homes that are insured at market value are likely to be underinsured when house prices are low, since in a weak property market the cost of rebuilding a house is often higher than its market value. Conversely when property prices increase you run the risk of being overinsured as the cost of rebuilding a home is likely to be less than its market value.

In short, if you insure at market value, you will either be paying too much premiums by being overinsured or you will be under insured and suffer a reduced settlement when you claim.

As such, homeowners should at all times “track variations in rebuilding costs when it comes to insuring their homes, and not be guided by the market value” says Burger.

Yet, variations in rebuilding costs are determined by labour and building material inflation which often bear little reference to the market value of property.

Moreover, the longer people live in homes the more value they add over time. Things like garden walls and other features, carports, extra rooms etc. all add to the costs of rebuilding a home in the event of it being damaged or destroyed.

Rebuilding costs are usually “calculated as a square meter cost set at either a good, excellent or up-market rate - depending on the kinds of materials or finishes used to build the house” explains Burger. Establishing rebuilding costs are relatively simple and most building contractors or building valuers can advise or your insurer can refer you to one.

To avoid under or even over insuring, property homeowners should “at all times be confident that their home is valued at its rebuilding cost and not its market price” concludes Burger.