Just a note, adding physics wouldn't make the current water flow as it is in blocks. Best case scenario as the game stands would be the water blocks falling downwards due to gravity.
Having said that dynamic water is planned but as it will break all existing worlds/servers it will be implemented after everything else together with the other terrain/biome related updates.
Normal physics for everything will not be added to the game. The developer doesn't want to limit player creativity by having them care about putting together a proper frame for their house etc. Also physics would break every single player built structure to date which is something noone wants. As well as make building certain things e.g. the large ships you see, impossible with the existing planks/beams methods.