Market value tells you nothing about what a rebuild will cost

Stuff today ran the question most property owners never ask until it is too late, namely what it actually costs to rebuild a Kiwi house destroyed by a storm or fire. The answer is usually more than owners think. A decade of official and industry evidence points the same way. For a business audience this is a contingent liability. It sits on rental portfolios, on premises owned through a trading company, and on any loan secured against bricks and mortar.

The policy number is the payout ceiling

After the Canterbury earthquakes, insurers moved from unlimited full replacement cover to sum-insured policies. The owner nominates a figure, and that figure caps the payout. In 2016, Treasury estimated that up to 85% of homes could be under-insured by an average of 28%, with national underinsurance as high as $184 billion.

The same analysis showed how the risk clusters. In a modelled magnitude 7.5 Wellington fault quake, 95% of homeowners faced no shortfall. Several thousand households, however, faced an average gap of around $40,000 each. That is how underinsurance works in practice. Most owners are fine, and a minority are badly exposed. Nobody knows which group they are in until the claim is assessed.

Calculators built on stale maths

The warnings came early. In 2013, Construction Cost Consultants’ then-managing director Gary Caulfield said around 90% of homeowners could be underinsured. He put default sums at least 25% short of true rebuild cost, and up to 50% short once retaining walls and complex features were included. The Insurance Council called it scaremongering at the time. Later findings have not been kind to that response.

In 2023, Fraser Walker, risk and insurance lead at the same firm, said online rebuild calculators underestimate by “at least 20%” because they lean on outdated council data. He was equally blunt about valuers. “A regular valuer is looking at market valuation, but that bears no resemblance to rebuild cost,” he said. The bank valuation on your rental tells you what a buyer might pay. It tells you nothing about the cost of a builder, consents and demolition after a fire.

Owners sense the problem and still do nothing

A 2022 CoreLogic survey found 38% of policyholders did not know what their property was insured for. Respondents believed rebuild costs had risen 41% while property values rose 31%, so they correctly sensed that construction inflation was outrunning value growth. Yet 56% had not reviewed their cover in the past year.

Then-CoreLogic NZ country manager Simone Moors framed it as a systemic issue. “For mortgaged homeowners there is a hidden risk sitting on New Zealand banks’ balance sheets,” she said. If the collateral burns and the insurance falls short, the borrower and the lender both carry the gap.

Premiums are pushing owners the wrong way

Cost pressure makes this worse. The Reserve Bank’s May 2024 Financial Stability Report found dwelling premiums rose 98% between 2015 and 2024, against 30% general inflation. It also warned that rising premiums may lead people to cut their sums insured and lift excesses. In other words, owners trim cover just as their risk rises.

Treasury’s June 2024 insurance update found the cheapest online premiums rose 24% between October 2022 and April 2024. Main dwelling insurance uptake fell from 89.2% in 2017 to 83.7% in 2023. That is a double exposure. Fewer people are insured, and those who are insured are increasingly likely to be covered for less than a rebuild would cost.

The Crown backstop is a contribution, not a rescue

Many owners assume the state will fill the gap. It will not. As 1News reported in 2024, NHCover generally contributes up to $300,000 toward home repairs. Land cover is tightly limited. The Natural Hazards Commission itself warned the land payout “likely won’t be enough to cover the full cost”. The scheme is a residential top-up. It is no substitute for an accurate private sum insured, and it is no help at all for commercial premises.

Fix it before the next storm

The remedy is cheap compared with the downside. Get an independent quantity surveyor’s reinstatement valuation rather than relying on an insurer’s calculator or a market appraisal. Then review the figure every year, not whenever the renewal email happens to get opened.

For landlords with several properties, one total loss on an underinsured rental can wipe out years of yield. For SMEs owning their premises, a shortfall turns a disaster into a refinancing problem. For anyone with property pledged as security, it could also become a conversation with the bank.

The sum-insured model put the risk on owners. Most have not yet priced it properly. The next big storm or fire will show who has, and those who have not will find out at the worst possible time.

Sources

• Stuff: Here’s what it actually costs to rebuild a Kiwi house destroyed by a storm or fire (2026-10-26)
• RNZ: Many houses believed underinsured by 25% – 50% (2013-11-26)
• Insurance Business: NZ rebuild cost calculators underestimate by ‘at least 20%,’ expert says (2023-03-11)
• RNZ: Underinsurance an increasing problem for homeowners, property research firm says (2022-10-27)
• Treasury Report T2023/2206: Insurance update (2024-06-27)
• 1News: Natural hazards and house insurance – what most homeowners don’t know (2024-08-07)
• Opteon: Tackling underinsurance exposures with reinstatement valuations