'House prices to plunge'

House prices will fall by 30 to 40 per cent during the next four years, one of the City's most successful fund managers has warned.

Neil Woodford, who manages funds worth £6billion at Invesco Perpetual, is preparing for a sharp decrease in property prices. His forecast, which he describes as a "healthy correction", would bring the average price of a home from £153,700 to £92,200.

Consumers' heightened sensitivity to higher interest rates would send prices markedly lower, Mr Woodford said, adding: "People have borrowed a hell of a lot more money than they have ever borrowed before."

He said that while a house price fall of this magnitude would only bring prices back to where they were 18 months ago, even that would hit the economy.

Mr Woodford said he was steering clear of companies linked to the housing market, construction, retailing and banking. He has invested heavily in defensive stocks, such as tobacco.