Yet more evidence that UK house prices have begun to fall again has emerged over the last few days with surveys from the Bank of England, Nationwide and Hometrack all pointing down. The question is, how deep will the falls be this time?

The latest data from the Bank of England was pretty clear. Mortgage lending for house purchases fell by 3.7 per cent in June and has now been down for four months in row. Approvals for house purchase are now 6 per cent lower than a year ago.

Meanwhile, Hometrack and Nationwide both reported falls in house prices in July. Hometrack reported a 0.1 per cent drop, Nationwide had prices down 0.6 per cent. On an annual basis, the Nationwide index is up 6.6 per cent.

 Martin Gahbauer, Nationwide’s Chief Economist, said: “Up until recently, the shortage of buyers in the market was more than offset by an even more severe shortage of properties for sale, with the result that prices rose. Evidence continues to build that this imbalance between supply and demand is easing. The abolition of HIPs has encouraged more speculative sellers to test the market, while some of the excess supply seen in the rental market during 2009 now appears to be making its way back into the sales market as temporary landlords make another attempt to sell their properties.

“At the moment, the market is clearly easing relative to the very tight supply conditions that characterised it since early 2009. However, it will take several more months to establish whether house prices are now simply oscillating around a flat price trend or whether a period of downward trending prices may be in store.”

But the evidence is perhaps slightly clearer than Mr Gahbauer is suggesting. Last month the index from the Royal Institution of Chartered Surveyors tracking new instructions surged, hitting 27; that’s the highest score in a very long time. Meanwhile, the index tracking new enquiries fell to minus 5.

The point is this, the Bank of England lending data is a forward indicator, as are the indices from RICS tracking enquiries and new instructions, and both indices have been pointing to price falls for some time now.

The recent falls reported in the Nationwide and Hometrack measures of house prices probably reflect trends shown up in the RICS indicators several months ago. And since then the RICS indices have been pointing towards further falls.

So it is clear, declining house prices are going to be with us for several months. But what about beyond that? What about 2011 – what then?

Looking that far ahead, current indices from RICS are irrelevant.

On the down side we have the recent news that wage inflation is lagging behind retail price inflation. The hike in VAT can only exacerbate the fall in household disposable income. Under any normal circumstances, falling real income is associated with falling house prices. No wonder the National Institute of Economic and Social Research reckons house prices will fall in real terms over the next five years – or so it claimed earlier this week.

But the UK is not normal. Interest rates are low because the economic outlook is so poor. And yet low rates are seen as propping up house prices. This cannot make sense, not in the long run.

Rates are also low because of the danger of deflation. Deflation should have the effect of pushing property prices down. And yet there is no shortage of economists who worry about deflation one moment, and then predict house price inflation the next.

Actually, in a way, the purpose of quantitative easing is to push up house prices. Well, not just house prices, but assets in general. So the Bank of England buys government bonds, forcing up their price, and making other assets such as corporate bonds, equities and property look cheap in comparison.

In the long run much will depend on inflation, and interest rates relative to inflation. At the moment real rates – that’s interest minus inflation – are negative. The Bank of England admits inflation will stay over target for around 18 months, thanks to the VAT hike. But Mervyn King has also hinted that rates will stay at the current level for some time. So the real rate of interest will remain negative for quite a while – maybe for the rest of this year and all of next.

But what really counts is not inflation, it is wage inflation. The hawks reckon inflation will run wild. But this will only happen if wages shoot up, too. If under these circumstances rates remain low, then clearly surging house prices become more likely .

On the other hand, should deflation set in, and since interest rates can never be negative, the real rate of interest will rise.

But surely, while it is true that real rates might be negative for a while, they are going to rise in real terms eventually. Interest rates at current levels are just not normal.

And for as long as the average house price compared to average income is so high, the property market will always be vulnerable to shocks, and the danger of a crash will be ever present.