Homeowners at risk in market muddle – FNB Insurance Brokers

A housing market muddle could render homeowners vulnerable to under-insurance running into hundreds of thousands of rands.

The warning has been sounded by FNB Insurance Brokers, short-term insurance broking arm of the FirstRand Bank financial services group and a company with a nationwide book of homeowner business.

The problem is that the housing and construction markets are sending mixed or muddled signals to the public, says Debbie Donaldson (pictured right), MD Personal Lines.

“After nearly two years of successive interest rate increases, residential property prices have stalled or dipped,” she explains. “Some homeowners therefore assume that there is no pressure on them to step up the insurance cover on their property.

“However, building industry inflation – involving both labour and materials – continues to rise steadily. This means that it costs more and more to rebuild or repair a property in the event of destruction or damage.

“In other words, there is a strong case for reviewing the replacement value of the property and stepping up your cover, though you may have been lulled into a false sense of security by news of softer residential property values.”

FNB Insurance Brokers is represented in all provinces and major centres. It says building inflation levels vary geographically, but appear to be in double digits in most areas.

Inflationary pressures in the construction industry are expected to continue for some time.

Debbie Donaldson notes: “The average homeowner may wonder what it has to do with him/her when government announces in the Budget that spending on public sector infrastructure will run to about R568 billion for the next three years. Not sure I get the relevance

“In fact, knock-on effects impact everyone who builds an extension to their home or calls in a building contractor for repair work.”

“In the current environment, some parts of South Africa are starting to look like a building site as work proceeds on major projects, driving up demand for skills and materials and keeping prices high.”

These cost pressures are not appreciated until a homeowner suddenly faces a structural problem following storm damage or a fire.

“The issue that’s top of mind is that someone on your street had to bring his price down R100 000 before he could sell his house,” says Debbie Donaldson. “That suggests inflationary pressure has eased when the opposite is true in the building industry.”

“Pressures won’t end in 2010 with the Soccer World Cup. They will go on for several more years because spending on new national infrastructure is projected to continue well after the completion of new sports stadiums.”

Some financial institutions make periodic adjustments in the home replacement values of their mortgage-bond clients, but the underlying responsibility for maintaining an appropriate level of cover rests with the homeowner.

Debbie Donaldson: “We advise our clients not to take risks; undertake a periodic review. If your home is destroyed and you have cover of only R750 000, you could be in serious trouble if you find a total rebuild now costs R1 million.

“Disparities running into hundreds of thousands of rand are quite possible, especially if the insured sum has not been reviewed for several years.

“For peace of mind, call in a reputable broker and undertake a thorough review – then make a mental note to do the same next year.”