Replacement Cost vs. Market Value: Understanding Rebuild Costs and Market Value

Replacement Cost and Market Value: Two terms that are frequently used together, and often erroneously used interchangeably when discussing the value of your home. What is replacement cost and market value? More importantly, what is the difference?

 

Replacement Cost

Replacement cost, replacement cost new, or rebuild cost all refer to the same thing when it comes to your home. Replacement cost is the price it would cost your insurance company to rebuild or replace your home from the ground up, in the event of a total loss. It is the dollar value it would cost to rebuild your home exactly as it stands today. Replacement cost factors in all the details of your home: the type of foundation; type and number of windows and light fixtures; square footage; number and size of bedrooms; type of exterior finishes and shingles; type of interior finishes: flooring, countertops, etc. All the build details of your home are factored into replacement costs.

In addition to these factors, replacement cost considers the price of materials and labour and inflation cost. Replacement cost can differ from region to region given that the cost of material and labour can vary greatly, not only from province to province but, from city to city or city to more rural areas.

 

Market Value

Market value is the price for which you can sell or purchase a home. Of course, the size and finishes of a home are considered when determining market value as well as other amenities and features; however, they are not the only determining factor. Market value is extremely dependent on the home’s geographic location: the value of the land, proximity to schools, grocery stores, the neighbourhood in which it resides.

Market value is extremely dependent on supply and demand. Thus, there is often a large difference between a home’s market value and its replacement cost. Depending on your geographic location, one can be much higher than the other. If a home’s replacement cost is valued at $300,000, EXCLUDING the site/land/lot, this means it would cost $300,000 to rebuild the home from the ground up to put the homeowner in the exact position they were in before experiencing the loss. If this home is located in a small town in Southwestern Ontario, the market value could be roughly $150,000, INCLUDING the land/site/lot. If the same home is located along a river, near good schools in the same small town, its market value could be $200,000 – $250,000; however, if you picked up this house and moved it to a high-end neighbourhood in Toronto, its market value could skyrocket to well over $1 million, INCLUDING the land/site/lot.

The fluctuations in a home’s market value are influenced by a wide array of factors, which include, but are not limited to: location, site services, nearby amenities, style of house, exterior finishes, “curbside” / “roadside” appeal, floor plan, size of rooms, kitchen, bathrooms, exterior and interior finishes, privacy features, site amenities, view, along with the current demand for houses in the area in contrast to the supply available. All of the above are a sampling of what impacts the market value of a residence, versus the replacement cost new which is primarily impacted by the supply and cost of materials and labour within the same general area.

 

Choose The Douglas Residential Cost Guide to Estimate Replacement Costs

In short, although equally important to a homeowner, a home’s replacement cost and market value are very different things and can reflect drastically different numbers depending on where the home is located.

When looking to determine your home’s market value, its best to call a realtor who will typically send an appraiser to examine the home, the area and surrounding sales to estimate your home’s market value. When looking to determine your home’s replacement cost, choose The Douglas Residential Cost Guide today and let us help you determine the rebuild cost of your most valued asset.