What Japanese interest rates, US$100 oil and global markets could mean for the cost of replacing a building in New Zealand.

A decision made by the Bank of Japan might feel a long way from a property in Timaru, but the distance between the two is much shorter than it appears.

New Zealand construction is relatively quiet with fewer projects getting started and contractors looking for work. In that environment, a property owner might reasonably assume that if their building needed to be rebuilt today, it would cost no more than it did at its last valuation.

The problem with that assumption is that local construction activity is only part of what determines the cost of a rebuild. Some of those costs are being influenced by events happening thousands of kilometres away.

Japan is moving away from decades of extraordinarily cheap money, borrowing costs are rising across major economies and oil is back above US$100 a barrel. These might sound like stories for economists and financial markets, but they can eventually affect the cost of finance, freight, fuel and imported materials here in New Zealand.

For decades, Japan has been one of the cheapest places in the world to borrow money. Investors have borrowed cheaply in Japanese yen and invested that money elsewhere for higher returns. As Japanese interest rates rise, that becomes less attractive, and at the same time, government borrowing costs are rising in the US and UK. Put simply, money is becoming more expensive globally, and New Zealand is not isolated from that. 

Oil adds another pressure with higher energy prices flowing through freight, manufacturing, transport and construction supply chains. They can also add to inflation and keep pressure on interest rates. This means some of the costs involved in rebuilding a property can continue to rise even when the local construction market is slowing.  

That does not mean everything is becoming more expensive. A quieter market may create more competition between contractors and make some parts of a rebuild cheaper. Other costs may stay the same or increase. The important point is that they do not all move together.

There is also more to a rebuild than the building itself. Following a major loss, the total cost can include demolition, site clearance, design, consenting, professional fees, temporary works and the time required to get the property rebuilt. These are all part of understanding the true cost of reinstatement.  

A property in Timaru can therefore have exactly the same floor area, structure and use as it did 12 months ago, while the cost of replacing it has changed. A quiet construction market does not necessarily mean it would cost less to rebuild.

That is the connection between Tokyo and Timaru, and it is the part that matters for insurance. Brokers do not need to follow Japanese interest rates or predict where oil prices are heading. But it is worth challenging the assumption that a slower construction market means an existing sum insured must still be right.

For Brokers, the question is simple: when was your client’s rebuild cost last professionally assessed? For underwriters, it is whether the sum insured is supported by a current rebuild valuation that reflects the full cost of a total loss.

A quiet construction market can change where the pressure sits, but it does not remove the risk of an outdated valuation. A current assessment gives the property owner, Broker and Insurer a much stronger basis for setting the Sum Insured.