* Home sales fall 2.1 pct mth/mth, price gains slow
* Economists look to summer market for signs of bottom
* Household debt still rising, but increase has slowed
TORONTO, March 15 (Reuters) - Sales of existing homes in Canada fell in February and the accumulation of household debt slowed in the final quarter of the year as tighter mortgage rules kept consumer appetite for low interest loans in check.
Reports on Friday showed that a softening in the Canadian housing market was well underway and household debt levels had risen more slowly than in previous quarter.
The data follows repeated warnings by policymakers last year that the housing market could overheat and consumers were taking on too much debt.
The Canadian Real Estate Association said February home sales fell 2.1 percent from the month before, reversing the small gain recorded in January, while sales dropped a sharp 15.8 percent from a year earlier.
Prices, which don't respond to a drop in demand as quickly as sales do, rose 2.7 percent in February from a year earlier, according to the group's Home Price Index. While still a healthy annual gain, it was the smallest year-over-year increase since March 2011, suggesting sellers can no longer demand the price tags they once could.
"February 2012 saw an extra selling day due to the leap year. However, the year-over-year decline between this February and last year is largely a reflection of demand that is well off from 2012," Gregory Klump, CREA's chief economist, said in a statement.
CREA said the government's move to tighten mortgage lending rules in July 2012 has slowed the market, and lower activity is expected until at least the June-to-August peak season.
"Until we get well into the summer months, year-over-year comparisons to months in the first half of 2012 are predictably going to be down significantly but not necessarily be indicative of further deterioration," Klump said.
Economists at Canada's big banks were also sanguine, noting slowing sales have returned the market to more healthy levels, suggesting the market's return to earth may be more of a soft landing than a crash.
"The good news is that sales are now at levels that we feel are well supported by underlying employment and population growth. In turn, existing home sales are likely to stabilize in the coming months. Prices are expected to continue to weaken as demand for Canadian housing remains modest," TD Bank economist Diana Petramala said in a research note.
The federal government tightened mortgage lending rules after roaring sales since 2009 and historic levels of household debt sparked fears of a bubble. Sales have slumped since, and economists are divided over whether to expect a U.S.-style housing crash or a gradual decline and subsequent plateau in sales and prices.
The Canadian housing market has major regional imbalances, with the slowdown sharpest in Vancouver - which had the hottest market during the boom years - and a more gradual softening in Toronto and Montreal.
BMO Capital Markets Senior Economist Robert Kavcic said he believes the housing market has largely adjusted to the mortgage rule changes, which initially staggered in response.
"Location is key, and Vancouver (or British Columbia generally) is the weak neighborhood with buyers firmly in control. This masks more balanced conditions elsewhere, with prices in some other markets stabilizing, if not improving somewhat after adjusting to stricter mortgage rules implemented in July," Kavcic wrote in a research note.
The number of newly listed homes fell 1.2 percent month over month in February, leaving them at their lowest level since November 2010, CREA said.
There were 6.8 months of inventory at the end of February 2013, up from 6.6 months reported at the end of January.
The real estate group said the national average price, not seasonally adjusted, for homes sold in February 2013 was C$368,895 ($359,500), representing a 1 percent decline from the same month last year. The group's price index, considered more representative of the overall market, rose 2.7 percent from a year earlier, the slowest pace since March 2011.
HOUSING DEBT UP, BUT SLOWING
A separate report from Statistics Canada showed households increased their debt load for the third consecutive quarter, keeping the debt-to-income ratio at an all-time high of 165.0 percent, although it rose much less than the previous quarters.
Soaring personal debt has been a top concern of Canadian policymakers as consumers take out mortgages at ultra-low rates to buy homes in the heated real estate market. After mortgage rates crept up late in 2012 at least one of Canada's major banks in recent weeks dropped its official rate on a 5-year fixed mortgage to 2.99 percent, a move that provoked a scolding from Canadian Finance Minister Jim Flaherty.
Partly because of the government's tighter rules for insured mortgages, the Bank of Canada in January predicted the trend growth in household credit would moderate and the debt-to-income ratio would stabilize at around current levels.
The debt-to-income ratio rose 0.3 percentage point in the fourth quarter from 164.7 percent in the third, much smaller than 1.5- and 1.6-point increases in the previous two quarters.
Statscan said household debt and income rose at roughly the same rate in the fourth quarter.
Households' credit market debt, which includes mortgages, consumer credit and loans, rose by C$14.7 billion in the quarter, about half the increase seen in the third, Statscan said.
Mortgage borrowing led the demand for credit in the fourth quarter, rising by C$11 billion to a total of C$1.1 trillion. In the previous quarter, mortgage borrowing increased by C$19.1 billion.
Consumer credit debt stood at C$477 billion at the end of 2012.