SA homeowners face huge loss as price gap on homes hits record high.
The price gap between building a new home and buying an existing one reached a record level at the end of 2011 following steep rises in the costs of labour and materials. As a result, an increasing number of South African homeowners may be leaving themselves exposed to huge financial loss should damage be caused to their property.
The latest housing review released by Absa showed that it was 34.5% cheaper to buy an existing home in the fourth quarter of last year than to have a new home built. This is the widest the gap has been since the survey began, beating the previous record of 33.8% 12 months earlier. According to the review, the price of building a new middle segment house rose 6.6% to R1.52 last year while the price of an existing house in this segment rose 1.8% to R1.04m.
According to Helen Szemerei, CEO at IntegriSure, many homeowners make the common mistake of insuring their home for its market value rather than the rebuild cost. “Consumers often believe that the insurance of a property is based on what they paid to purchase it, or its current market value. However, this is not the case. Insurers or underwriters base the insurance premium on what it would cost to return the client to their former position, so in this case what it would cost to rebuild a property, not to buy another home.”
Szemerei cautions that if a client insures a house for less than what it would cost to rebuild it, and the property then suffers extensive damage, the insurer will only pay out on the portion of the claim that the client was correctly insured for. “This is known as the Average Clause, which means that if you underinsure your property (or any item), your claim will be reduced in proportion to the level of underinsurance.”
“For example, if a house is insured for R1.0m but it would cost R1.5m to rebuild it; the house must be insured for the latter amount. If it is not and then suffers extensive damage, insurance assessors will determine that the property was underinsured by 33%. Practically, what this means is that if damage to the house amounts to R500 000, the insurer will only pay out on the portion insured, in this case R333 000 (66% of the claim), with the homeowner themselves having to pay in R167 000 (33% of the claim) to make up the shortfall.”
Szemerei warns that if a homeowner is left to pick up the remaining part of the bill to rebuild the property this can leave them in a financially disastrous position. “If a homeowner is still paying off the bond on the property and is unable to find the money to make up a shortfall in rebuilding it, they could find themselves either rebuilding a home to a much lower standard or worse, still paying a bond on a property they no longer have.”
She says it is vital that homeowners contact their broker or their insurance company to insist that an accurate assessment of their property is conducted. “Underinsurance is easily avoidable if homeowners take reasonable steps to ensure that they are correctly insured in the first place and insurance companies often view such a proactive approach in a very positive light.”
“While this may seem like an administrative headache, it is nothing compared with the nightmare scenario of finding out after a devastating loss that you do not have enough money to rebuild your property,” concludes Szemerei.