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* Home sales drop from month and year earlier
* Home price index up 3.6 pct, smallest gain since May 2011
By Andrea Hopkins
TORONTO, Nov 15 (Reuters) - Sales of existing homes in Canada fell in October from September and year-over-year sales were down as well, the Canadian Real Estate Association said on Thursday in the latest signal that the housing market is slowing.
The industry group for Canadian real estate agents said sales were down 0.1 percent in October from September. Actual sales for October, not seasonally adjusted, were down 0.8 percent from a year earlier.
The housing market, which roared higher in 2011 and the first half of 2012, started to slow after the government tightened rules on mortgage lending in July in a bid to cool the market and prevent home buyers from taking on too much debt.
"Housing market trends in Canada for 2012 can be characterized as before and after regulatory changes," TD Economics senior economist Sonya Gulati said in a research note.
"In the first half of the year, sales and price gains were modest, but positive. More stringent mortgage rules and tighter mortgage underwriting rules have 'purposely' knocked the wind out of the housing market sails," she said.
The home sales data showed diverging paths in Canadian housing depending on location. In Toronto and Vancouver, where sales and price gains were red hot in 2011 and early in 2012, the market has been cooling. But markets in the resource-rich western provinces of Saskatchewan and Alberta have been gaining strength.
"Opinions differ about how sharply sales have slowed depending on the local housing market," Gregory Klump, CREA's chief economist, said in a statement.
Led by Calgary, sales in October were up from a year earlier in almost two-thirds of local markets. Sales remained blow year-earlier levels in Toronto, Vancouver and Montreal, CREA said.
"These results suggest that the Canadian housing market overall has returned to a more sustainable pace," Klump said.
CREA's Home Price Index rose 3.6 percent in October from a year earlier, the sixth consecutive month in which gains in prices slowed, and the slowest rate of increase since May 2011.
While tighter mortgage rules have worked to slow the market, TD's Gulati said the big question is what will happen when that temporary cooling effect wears off in early 2013.
"What happens thereafter is less certain. The low interest rate environment could pull homeowners back onto the market, causing home prices to once again trek upwards. Alternatively, an absence of pent-up demand may leave the market in a bit of a lull until interest rate hikes resume in late 2013," she wrote.
"Under either scenario, it is safe to say that there is a low probability of out-sized home price gains over the near-term."
A total of 402,322 homes traded hands via Canadian MLS systems over the first 10 months of 2012, up 0.8 percent from the same period last year and 0.4 percent below the 10-year average for the period, the data showed.
The number of newly listed homes fell 3.8 percent in October following a jump in September. Monthly declines were reported in almost two-thirds of local markets, with Toronto and Vancouver exerting a large influence on the national trend.
Nationally, there were 6.5 months of inventory at the end of October, little changed from the reading of 6.4 months at the end of September.