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UPDATE 1-New Zealand housing market continues recovery in January but headwinds loom

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* House prices rise 7 pct annually in Jan - REINZ

* Sales volumes rise for first time in seven months

* Underscores modest post-election recovery though headwinds loom

(Re-casts, adds economist comments)

By Charlotte Greenfield

WELLINGTON, Feb 15 (Reuters) - The New Zealand housing market posted modest price growth in January and sales volumes picked up, snapping seven months of falls, but policy changes could mean only a slow recovery.

Seasonally adjusted median house prices rose 7.0 percent since January 2017, the Real Estate Institute of New Zealand (REINZ) said on Thursday. Prices edged up 0.6 percent on a monthly basis.

Sales volumes grew for the first time since June for an annual rise of 2.7 percent.

"In short, housing market activity is well off its lows, suggesting house price inflation has likely also found a floor but the market remains much cooler than it has been," said Sharon Zollner, chief economist at ANZ Bank.

The market had tapered off from its double-digit growth around the middle of 2017 as investors were spooked by a the length of time it took to form a coalition government following last year's elections.

Prices had started to pick back up in November and January saw some added support from the central bank's decision to wind back some of its lending restrictions.

"The general sense from January housing market data is one of a market that is only gradually recovering," said Jeremy Couchman, Kiwibank senior economist.

The outlook for the rest of the year was not quite as rosy.

The new Labour-led government planned to introduce a number of restrictions including a ban on most foreign homebuyers, and widened taxes on investments, which could see the prices relatively flat over 2018, economists said.

"In our view, the market is unlikely to take off again due to affordability constraints...and new Government policies," Zollner said.

(Reporting by Charlotte Greenfield; Editing by Andrew Heavens)

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