'Dr Doom' predicts house price crash to rival the 1980s

The City investment guru derided for predicting the dotcom bubble would burst cast his gaze on the property market yesterday and said house prices were set for a crash that could see values fall by almost a third.

The City investment guru derided for predicting the dotcom bubble would burst cast his gaze on the property market yesterday and said house prices were set for a crash that could see values fall by almost a third.

Tony Dye, whose prediction of a messy end to the dotcom era earned him the sobriquet "Dr Doom", accused lenders of fuelling an overheated housing market and said buyers were being driven by a "herd" mentality in the mistaken belief that prices could only rise.

The fund manager said he expected the value of houses in London to fall by 30 per cent in real terms over the next five years and a similar decline across the country as the market was flooded with homes by owners seeking to cut their losses. The gloomy forecast came as government figures showed that prices in the UK fell by 1 per cent in February and the annual rate of increase rose by just 0.1 per cent to 9.7 per cent.

Mr Dye, who as the investment chief for a leading City firm was ridiculed for predicting a crash in hi-tech stocks in the late 1990s, said he was convinced the "silly" growth in the property market was about to reverse. He said: "I think we have reached the point where the rises are no longer sustainable and correction is likely to be fairly dramatic - about as bad in real terms as the crash in the 1980s.

"It is going to be distressing for those who have bought in recent months and are likely to find themselves trapped in negative equity. It would have been better if the boom had not happened but people have been lured into borrowing beyond their means."

The investment manager stepped down as the head of investment at Phillips & Drew, a leading fund management group, in February 2000 after shunning technology stocks during the 1990s boom, warning they were overvalued and headed for a steep correction. His financial critics grew frustrated when his predictions failed to materialise and the sector delivered spectacular returns while he concentrated on less lucrative investments.

Within weeks of his departure from Phillips & Drew, the hi-tech bubble collapsed, vindicating his position. He now heads his own hedge fund company.

Mr Dye said predictions of a "soft landing" for the housing market, consisting of a gentle slow-down in price rises, ran contrary to the performance of markets over the last 35 years.

He said: "People seem to believe that property prices can only rise but that is contrary to the cyclical nature of these things. When there has been a rise of this scale it is not followed by a soft landing. That is not how it happens."

The analyst is the latest senior figure to warn of an imminent price reversal. Durlacher, an investment bank, and Capital Economics, a consultancy, have issued similar warnings. Figures from the Office of the Deputy Prime Minister showed a fall in the average price of a home in February from £162,559 to £160,937. But the statistics are unadjusted for seasonal averages, meaning they reflect the traditional quiet season in the housing market. The figure for February 2003 showed a similar drop of 1.1 per cent followed by a steady annual rise.

Lenders rejected Mr Dye's claims, reiterating the Bank of England's analysis that economic conditions, including low interest rates, high employment and a shortage of housing, precluded a disaster. David Bitner, of the mortgage broker Bradford & Bingley Marketplace, said: "The chance of house prices falling are less than 5 per cent. There is an argument for saying things have got ahead of themselves in some cases but the general economic situation remains good."

DYE'S OUTLOOK

Japan

In charge of a portfolio worth £60b, Mr Dye ended investments in Japanese companies in the mid-1980s. Within a year, the crisis in the nation's economy was apparent, costing other investors billions.

Dotcom bubble

As early as 1995, Mr Dye was predicting a crash in the stock market, putting 15 per cent of holdings into cash and eschewing technology stocks. Critics said he was losing dividends on stars such as Vodafone.

The future of the stock market

Mr Dye believes that stock markets are still overvalued. Of the FTSE100, he said: "It is still probably not priced to give very good long-term real returns."