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By Louise Egan

OTTAWA, Nov 12 (Reuters) - New home prices in Canada rose in September at their fastest rate in 20 months, highlighting the country's strong housing market which contrasts with sluggish growth elsewhere in the economy.

Statistics Canada said on Thursday new home prices rose by a sharper-than-expected 0.5 percent in September. The federal agency cited improving markets and consumer confidence as reasons for the jump in the new housing price index, which exceeded market expectations for a 0.2 percent gain.

The 0.5 percent rise topped even the most optimistic of 15 analysts polled by Thomson Reuters.

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

"Real estate has been the economic surprise of 2009," said Stewart Hall, markets strategist at HSBC Canada in a note to clients.

Home sales are above peak levels seen prior to the global financial crisis and recession, which may be explained by pent-up demand, consumer confidence and rock-bottom interest rates, according to Hall.

"Today's new home price data seems to be pointing to an inflection point," he said.