Housing Market Muddle in SA

Be Sure to Up Home Insurance

A press feature released by FNB Insurance Brokers has warned that homeowners should beware of a housing market muddle that could render them “vulnerable to under-insurance running into hundreds of thousands of rands”.

The short-term insurance broking arm of the FirstRand Bank financial services group believes that the problem lies in the housing and construction markets sending out mixed signals to the public, says Debbie Donaldson, MD Personal Lines.

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

However, the reality is that building industry inflation, which includes both labour and materials, continues to increase at a steady rate. Essentially, this translates into higher and higher costs for the rebuilding or repair of property that may be damaged or destroyed in an unforeseen event (Donaldson).

What Donaldson wants to stress is that, “[T]here 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 represents a clientele in all provinces and major centres in the country. Building inflation levels are said to vary geographically, but appear to be in double digits in the majority of areas. To make matters worse, the inflationary pressures in the construction sector are expected to continue for some time to come.

Donaldson points out that, “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.” The reality is that the knock-on effects of this will affect anyone who wants to build an extension on their home or calls in a contractor to repair damage to their property.

“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,” adds Donaldson. The homeowner does not appreciate the cost pressures until they suddenly experience storm damage or a fire and structural problems need to be repaired.

At the moment, what is on the top of everyone’s mind is how that neighbour on your street or one nearby had to bring his sale price down R100 000 before he could find an offer (Donaldson). This suggests that inflationary pressure has eased, when in fact the opposite is true in the construction sector.

Donaldson doesn’t believe that the 2010 Soccer World Cup will alleviate these pressures, as the expenditure on a new national infrastructure will continue well beyond the completion of the new sports stadiums.

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

The advice that Donaldson gives is “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.”

A scenario where there are disparities running into hundreds of thousands of rands is not unlikely, especially if the sum insured has not been reviewed for a number of 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,” urges Donaldson.

The information in this article is courtesy of Carol Dundas (“Rebuilding costs are increasing while residential property prices have stalled or dipped”, ITInews, 26 May 2008).

If you are interested in buying or selling property in South Africa, please visit www.sahometraders.co.za.