Home Insurance Replacement Cost vs. Market Value

Replacement Cost and Market Value are frequently used together, and often erroneously used interchangeably when discussing the value of your home. However, homeowners need to understand that there are key differences between home insurance replacement cost and market value.

What is Home Insurance Replacement Cost?

Replacement cost, replacement cost new, or rebuild cost all refer to the same thing when it comes to your home. It is the dollar value it would cost your insurance company to rebuild or replace your home from the ground up, in the event of a total loss, 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 doors
  • Square footage
  • Number and size of bedrooms
  • Type of exterior finishes and roof covering
  • Type of interior finishes such as flooring, countertops, etc.

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.

What is Market Value?

Market value is the price for which you can sell or purchase a home on the real estate market. 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. The fluctuations in a home’s market value are influenced by a wide array of factors, which include, but are not limited to:

  • Location and land
  • 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
  • Views
  • Current demand for houses in the area in contrast to the supply available

What is the difference between market value and replacement cost?

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.

For example, 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 $350,000, 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 $400,000 – $550,000; 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.

When is Replacement Cost Higher Than Market Value?

In some instances, reconstruction costs can actually be higher than a home’s resale value. This is because market value is only influenced by what buyers want to pay for a property and not how much it costs to rebuild it. When homes are made from rare, or expensive materials, or located in an area where the land doesn’t have much value, it can lead to the rebuild value of a property being higher than its market value.

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, it’s 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. Our rebuild cost calculator can help you determine the accurate replacement costs, which can be helpful when speaking with insurance companies. Let us help you determine the rebuild cost of your most valued asset.