It is no secret that building costs have risen steeply across all Australian states since Q3 2021. The cost increases are due to several factors including:
- wage increases
- general labour shortages
- supply chain delays
- material shortages
- the war in Ukraine
The rate of increase will eventually slow, and it is already showing signs of doing this. However, the historical evidence indicates that prices are unlikely to return to their previous levels.
All buildings have been affected; but residential buildings are amongst the worst hit. This is because materials commonly found in residential buildings such as plasterboard, timber and cement have risen by as much as 50% since 2021. There is also a large component of carpentry, tiling, plumbing and electrical work in residential buildings and all these trade groups are experiencing severe labour shortages. These shortages elongate the time it takes to rebuild following a claim, and this in turn adds to the overall construction costs. Labour shortages also result in higher wages being paid to subcontractors. And so, the cost spiral continues.
Replacement valuations consider the cost to demolish the building, the cost to reconstruct the new building, the professional fees involved and the escalation costs during the period required to demolish and rebuild. The largest component of these costs is by far and away, the cost to rebuild. It follows then that any abnormal rises in the cost of construction directly impacts the replacement valuation amount.
All States and territories in Australia have legislation that requires bodies corporate / owner’s corporations to insure the common property (which includes all the improvements situated on the scheme land) for full replacement value. Most legislation also requires the body corporate or owner’s corporation to engage the services of a quantity surveyor to prepare a replacement valuation report that considers current construction costs. To remain prudent and comply with the legal requirement for full replacement cover, many schemes would need to commission a new valuation, if the current valuation they are relying on was prepared prior to 2022.