HOME TRUTHS: Will your insurance cost less as house values drop?

IF YOUR house has fallen in value then it must cost less to insure, right? Wrong.

Homeowners could be forgiven for thinking that the weakening housing market will have a silver lining in the form of cheaper home insurance premiums, but unfortunately that isn't the case.

It's a common misconception that the market value of your home - the amount you can sell it for on the open market - is the amount for which it should be insured. However, the sum insured is actually the reinstatement value - the amount it would cost to rebuild the house. The amount insured is generally index-linked, which means that it automatically increases each year in line with inflation.

"The reinstatement valuations are the cost of rebuilding, as opposed to the cost of the home, so even though a house would reduce in value that has absolutely no influence on the reinstatement valuation," explains Richard Mossop of the Society of Chartered Surveyors, which produces an annual guide to help homeowners and insurers calculate rebuilding costs.

But what about the slowdown in the construction sector, particularly in housebuilding activity? Surely building prices will fall as demand for builders and labourers subsides, which in turn will translate into lower insurance premiums? Apparently not.

Martin Whelan of the Construction Industry Federation explains why: "The reinstatement cost really reflects the building costs, and the building costs reflect inputs such as labour and materials. And really those, if anything, have gone up.

"Obviously you probably have more builders available or competing for work," he continues. "Ultimately, though, the main bulk of the costs will still relate to materials." And because of inflation and other external factors, material costs are rising, he says.

Mossop says that the escalation in rebuilding costs is slowing, but he doesn't expect to see any reduction in reinstatement rates.

Michael Horan, of the Irish Insurance Federation, agrees that the construction slowdown is unlikely to have an impact on premiums.

"I don't think it'll affect premiums one way or another," he says. "There are a few things that go into the dynamic, but what influences the cost of premiums most of all is the cost of claims."

However, Horan points out that home insurance premiums have actually been falling year-on-year since 2002, and continue to fall - so it's certainly not all doom and gloom for homeowners.