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Replacement Cost Is Not Market Value

Market value and replacement cost answer different questions. One is driven by the property market; the other by the cost and scope of reinstating the relevant improvements.

ATR explanatory graphic for replacement cost vs market value
Visual guide accompanying this insight

A property can have a high sale value and a relatively ordinary rebuild cost, or a modest market value and an expensive building to reconstruct. Using one figure as a proxy for the other can create a serious insurance or asset-planning error.

At a glance

  • Market value reflects land, location, demand and comparable transactions.
  • Replacement cost reflects construction, demolition, fees, escalation and project constraints.
  • The two figures may move in different directions over the same period.

Market value asks what the property may transact for

Market value is influenced by land, location, planning potential, comparable sales, buyer demand, income potential and broader property-market conditions. The building is only one component of that value.

Two identical buildings in different suburbs can therefore have very different market values.

Replacement cost asks what it may cost to reinstate

A replacement or reinstatement assessment focuses on the relevant built improvements and the pathway required to reconstruct them under the assessment scope. It may include demolition, professional fees, authority costs, escalation, site constraints and code-related requirements.

A remote, highly specialised or difficult-to-access building can be expensive to replace even where local property values are relatively low.

Why the distinction matters for insurance

Moneysmart identifies using market value instead of rebuild cost as a cause of underinsurance. If the sum insured does not reflect the real cost to rebuild and related policy costs, the owner may face a funding shortfall after a major loss.

The insurance policy should be checked carefully because cover limits, exclusions, extended-cover provisions and treatment of ancillary costs vary.

Do not substitute a mortgage or purchase price either

The outstanding loan, original purchase price and accounting book value answer other questions again. None of them automatically represents current reinstatement cost.

For a material insurance or asset-management decision, the assessment basis and date should be stated clearly so the figure is used for the purpose it was prepared for.

General information only. This article is educational material, not legal, tax, financial, insurance or project-specific advice. Requirements, market conditions, legislation and policy terms can change, and the appropriate approach depends on the project and appointment.

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