UPDATE 1-Canada home resales cool in May, listings fall

* Home resales in May fall to 37,576

* Average price up 8.5 pct to C$346,881

* New listings drop 4 pct (Updates with details, comment)

TORONTO, June 16 (Reuters) - Sales of existing homes in Canada fell 9.5 percent in May from April as the country's real estate market slowed following months of brisk activity spurred by low interest rates, data on Wednesday showed.

The Canadian Real Estate Association said 37,576 homes were sold in May, down 9.5 percent from near-record activity in April and down 2.8 percent from May 2009.

The industry group said May's drop largely resulted from fewer sales in Toronto, Vancouver and Ottawa.

The cooler pace of activity is in line with a long-held view by economists that the market would start to slow with the onset of summer as more homes are put up for sale and interest rates began to rise. Sales peaked in December. [ID:nN18184642]

"Life in the fast lane is over for Canada's housing market. Now the question is whether it will stay in the middle lane, or brake even more aggressively," said Doug Porter, deputy chief economist at BMO Capital Markets in a commentary.

"We suspect it will brake harder, although the ongoing revival in employment will likely keep the housing market from veering onto the shoulder."

New listings dipped 4 percent from the previous month, marking the first decline in eight months.

May was the first full month in which stricter new mortgage regulations took effect. Anticipation of the new rules had encouraged deals to be made in earlier months, analysts said..

TD Bank economist Pascal Gauthier said the Canadian housing market, which has been "an early and frequent" contributor to the country's economic recovery is seeing stronger headwinds.

"Erosions in existing home affordability over the previous quarters, mostly due to prices outpacing incomes, are naturally taking a bite out of current sales," he wrote in a report.

"While interest rates should continue to rise modestly, affordability should stabilize in the coming quarters as incomes rise and prices come off their peak levels."

CREA said the national average price in May rose 8.5 percent from a year earlier to C$346,881 ($336,778).

Residential housing has been a solid component of the Canadian economy, even during the recession, spurred partly by low interest rates.

Earlier this month, the Bank of Canada raised interest rates for the first time in three years, and it is expected to continue doing so to bring rates to a more neutral level.

($1=$1.03 Canadian) (Reporting by Ka Yan Ng; Editing by Peter Galloway)