* Sales up 1.3 pct mo/mo; down 5.2 pct yr/yr
* Prices edge higher, but gains continue to slow
* Low interest rates expected to support market
* Bank of Canada head sees market adjusting further
TORONTO, Feb 15 Sales of existing homes in Canada rose in January from December and fell only modestly from a year earlier, suggesting the housing sector's recent slowdown hasn't developed into a full-blown correction.
Sales were up 1.3 percent in January from December, the Canadian Real Estate Association said on Friday.
The trade group for the country's real estate agents said that compared with a year earlier actual sales for January, not seasonally adjusted, were down 5.2 percent.
CREA's Home Price Index rose 3.1 percent in January from a year earlier, the smallest gain since April 2011.
Year-over-year sales began falling sharply in 2012, hurt by the Canadian government's tightening of mortgage regulations in July. The Conservative government took steps to cool the property market due to fears that ultra-low borrowing costs could fuel a bubble.
Economists have been divided over whether there will be a U.S.-style housing crash or a soft landing in which slower sales gradually stabilize prices.
Canadian home prices rose at the slowest pace in three years in December year-on-year, and housing starts fell more steeply than expected in January.
"We've seen adjustment in the housing market, we think there's a bit more to come in the next few years. Again, I think Canadians have listened to the message and they are adjusting," Bank of Canada Governor Mark Carney told CTV in an interview broadcast on Friday.
CREA noted that if sales activity holds near levels seen since last August, year-over-year declines will begin to fade after the crucial spring buying season.
"Until then, the focus may remain on how sales were stronger in the first half of last year compared to lower, but stable, national activity since then," CREA's chief economist Gregory Klump said in a statement.
BORROWING COSTS STILL LOW
The association pointed out home sales picked up from December in about half of all local markets, including the major centers of Toronto and Vancouver, Canada's two most expensive markets.
The number of newly listed homes rose 1.6 percent month over month in January, the first monthly increase since last September.
Analysts noted January is typically a slow month for home sales, making it harder to discern trends. But they also pointed out that the outlook for interest and mortgage rates is helping to support the market.
The Bank of Canada's key lending rate has been at 1 percent since September 2010 and the central bank said last month that soft economic growth and tame inflation mean an interest rate increase is not imminent.
"With the Bank of Canada backpedaling from its tightening bias, the risk of a reacceleration in housing remains non trivial," Mazen Issa, Canada macro strategist at TD Securities, said in a note to clients.
"Our base case heading forward is for a stabilization in the housing market and we do not expect a more pronounced correction until the bank begins to lift the overnight rate."
The median forecast in a recent poll of Canada's 12 primary dealers, the institutions that deal directly with the central bank as it carries out monetary policy, showed their median forecast for the next rate hike was the first quarter of 2014.