RBI cut CRR by 3.5 percentage points to 5.5 per cent over last 2 months.

The Repo rate is the rate at which the banks borrow from the RBI. If this rate is lower , bank can pass on the funds to the loan seeker at lower rate of interest. RBI cut this by 1.5 percentage points to 6.5 per cent.

A few other steps
The RBI also allowed on a temporary basis, the Housing Finance Companies (HFCs) registered with National Housing Bank (NHB) to raise short term funds in the form of foreign currency borrowing under the approved route from the foreign markets. This was an initiative to allow developer corporate to raise some finance from overseas. Besides, RBI also allocated about Rs1,000 crore from Scheduled Commercial banks for contribution to NHB in advance to cater to the developers back home. It further reduced the risk weights for real estate companies to 100 per cent from 150 per cent by giving a much needed breather to developers.

Not-so-good effect
Except for the CRR and Repo rate cut, all other measures were aimed at mid to long term processes. To curb inflation in the near future and to infuse life into the real estate sector efficiently, these steps fell short.

As far as the CRR and Repo rate effect is concerned, most private banks were reluctant to reduce the lending and home loan rates. Despite having larger chunk of fund available, the nationalised banks also played safe in these times of turmoil. Though they got the reduction of 1.5 per cent, they passed on only half of this advantage onto the consumer. The rate of interest for housing loan has been reduced by only 0.75 to 1.0 per cent till date. The average rate of interest is in between 11.5 to 112.5 per cent as of today.

FM proposal
Addressing the India Economic Summit recently, the finance minister assured that the banks were ready to lower the interest rates further if at the same time cost of goods could come down. "The classic response to the demand slow down is to cut price'' he said.

The cost to the developer includes three main component, cost of land, construction and money (finance). In most cases, the land is bought long back and at reasonable prices .The reduction in prices of steel and cement has been advantageous as construction cost decreased. With the RBI initiatives, the cost of money will also reduce and so it was expected that the developers should reduce the prices of their products.

"Cutting prices is a much better option than allowing inventories to built up NPA, lay-offs and retrenchment and digging a deeper hole.'' he said keeping in mind the probable impact of the profit-margin graph in the sector the real estate sector as the profit margin graph of this sector is quite good.

The profit margin graph
As per the records with the ministry, the real estate sector has raked up a profit margin of about 49.6 per cent of net sales up to 1 st November 2008. This is the highest mark among all the sectors. The next on list is IT sector which stands at 21 per cent while hotels and auto have marked 13.6 and 6.6 per cent profit margin respectively. The second significant aspect of this data was that only the real estate sector could see the rise in the profit margins during last one year while all other sector have witnessed decline. In all aspects, it was evident that the real estate sector was strong enough to bare the price cut and probably was the reason, FM pointed the finger atthe sector's profit margin. "Margin of profit after tax was 30 per cent and in the slow down it may have come down to half, which was still not bad." he said.

The reactions
Pravin Doshi, Chairman of Acme group, Mumbai and president of Maharashtra Chamber of Housing Industry (MCHI) is optimistic about the expectations. "Market forces always correct the prices. Individually, almost all have reduced the prices wherever possible however a collective announcement may improve the sentiment. He said.

However, KP Singh, the chairman of DLF gives a negative opinion. "There are no takers for housing. However, prices are correcting itself when necessary. Government should ensure larger supply of housing then the prices will come down."

A builder from Pune asks pointed questions the statements made by the FM. "If government is so keen on reducing the prices, why it is not waiving or reducing some fees and taxes on housing? We are told to reduce the prices and they are thinking of increasing stamp duty? What about our investors? What should we tell those buyers who booked the flats at the earlier price?" he questions.

The last mile
On one hand while the government is closely monitoring the liquidity situation and is gearing up for the next spat of measures in the same direction if the price line declines, on the other the RBI governor has spoken on taking an appropriate action at the right time. At the same time while the Prime Minister speaks of using the economic policy aggressively the FM is talking about inflation being in the single digits. The Confederation of Real Estate Developer's Associations of India (CREDAI) has planned to give a written response to FM's call on cutting prices. According to KV Kamath, president of CII and chief of ICICI Bank, people will see a newer set of prices in most of the products etc.

However, no one is sure of property price reduction. No one is taking a clear stand on it either. People are seeing political undertones and election oriented moves in all these. No body seems to care much about the genuine home seekers. Everybody is predicting a further reduction in interest rate as the result of another round of CRR and Repo Rate reduction by RBI in coming days. But still the million Rupee question remains unanswered, will these bring down the prices to a level where one can buy a house of his own?