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OTTAWA, Nov 12 (Reuters) - New home prices in Canada rose by a sharper-than-expected 0.5 percent in September, the fastest rate in 20 months, Statistics Canada said on Thursday in another sign of improving markets and consumer confidence.

Analysts surveyed by Reuters had, on average, expected just a 0.2 percent price gain in the new housing price index in the month.

The year-on-year decline in prices eased in September to 2.7 percent from a 3.1 percent decline in August.

Statscan cited better market conditions and a resurgence of consumer interest as the reasons builders raised their list prices in some major cities. Vancouver and Ottawa-Gatineau led the gains with hikes of 1.4 percent and 1 percent, respectively. The largest decline was in Windsor, Ontario.

Canada's housing market slumped during the recession, which is believed to have ended in the third quarter, but recent data suggest the sector is one of the economy's strongest in the recovery phase thanks in part to rock-bottom interest rates. (Reporting by Louise Egan, Editing by Chizu Nomiyama)