The Australian property market has recorded incredible growth over the past decade. During 2011-2019, nearly 1.6 million new homes were built. In addition, the total housing construction value was $101.6 billion in 2019. While this growth has tremendous upside to Australia’s economy, there is a concern: how is this value insured and is there enough insurance to cover the industry?
Key aspects of home warranty insurance
Home warranty insurance is available to homebuyers if there is an issue on the builder-side. Think about it as a warranty on your home. Some examples of when this insurance type arise may include:
- Defects or damages caused by the builder
- The builder passes away
- The builder becomes insolvent or goes into liquidation.
It’s worthwhile noting that home warranty insurance varies by state, including by name. The following table outlines the key coverage in each state:
| NSW | VIC | SA | WA | ACT | |
| Name | Home Warranty Insurance | Domestic Building Insurance | Building Indemnity Insurance | Home Indemnity Insurance | Residential Building Insurance |
| Insurance threshold | $20,000 | $16,000 | $12,000 | $20,000 | $12,000 |
| Insurance Coverage | $340,000 | $300,000 | $150,000 | $100,000 | $85,000 |
| Warranty | 6 years | 6 years | 5 years | 6 years | 6 years |
The importance of this insurance is that it protects the homebuyer as well as the builder. However, given the high volume of new builds each year, builders won’t be able to stay in business if they had to defend each build without any coverage.
Home warranty insurance also serves as a natural barrier to entry for builders. For instance, legitimate builders will ensure the insurance paperwork is current and accurate. However, the ‘shonky’ builders would likely fail this requirement, or be scared off by the consequences of not having home warranty insurance.
While home warranty insurance provides an essential industry benefit, there are some problems which I have outlined below.
Home warranty insurance has some inherent flaws
There are limits to home warranty insurance’s coverage. If there is significant defect or damage to the build (e.g. slab damage), the insurance may not cover the full amount. So while insurance exists, homebuyers should appreciate that it is not comprehensive coverage.
Furthermore, given the size of the residential construction industry, you would expect there to be several insurers in this space. However, the reality is that home warranty insurance is a government-backed program. For example, Western Australia has only one insurance provider that’s available to all builders.
This is somewhat concerning given the significance of the Australian housing market. Not to sound pessimistic, but it only takes 1-2 insurers to collapse for there to be a harmful ripple effect across the industry. The fact is this happened previously a few decades prior, when Australia’s second-largest insurer (HIH Insurance) went into liquidation in 2001.
Homeowners effectively bear the cost of home warranty insurance
Home warranty insurance increases the cost of construction, as builders pay insurance premiums to maintain the coverage. However, this construction cost is effectively passed on to the homebuyer.
Furthermore, the insurance cost passed to the homebuyer is based on a percentage of the build cost. For example, the insurance cost for a $500,000 home build is more than an insurance cost for a $150,000 home. This cost is disproportionate to the benefit received from the insurance, given the insurance coverage does not exceed $100,000.
The admin of maintaining the insurance can be overwhelming
There is a considerable amount of paperwork required for home warranty insurance, which is not limited to filing requirements. Builders must maintain additional reports and schedules to demonstrate they meet certain build standards.
Some builders, particularly the boutique outfits, don’t possess sufficient resources to constantly manage and maintain these requirements. This exposes the builder as well as the homebuyer, particularly if the builder becomes insolvent and the homebuyer loses any recourse.
In assessing the administrative requirements, bigger builders aren’t any better off, as they would be subject to the same compliance burden. While these builders are capable of hiring staff to manage these requirements, the cost of this additional headcount would ultimately be passed on to the homebuyer.
* * * *
Home warranty insurance is necessary for the sustainability of the residential property market. However, as much as it is important, measures should be taken to ensure it doesn’t lead to the market’s downfall.
Firstly, there needs to be more insurance players that can cope with the rising demand in residential construction. Secondly, the documentation requirements should be straightforward and standardised, to reduce compliance burden on the builders. Finally, and this may be wishful thinking, but the insurance coverage should better align with the home value.
The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.