The 4.20am fire in the derelict Whitby St house is being treated by police as suspicious.
Fire appliances from Dunedin Central, Lookout Point and Roslyn Fire stations found the house well alight on arrival.
Fire investigator Crawford Morris, from Invercargill, said the blaze started in a downstairs area at the rear of the house, but the damage was so extensive he was unable to tell what started it.
However, the house had been unoccupied for years and was not connected to electricity, but there were beer bottles inside, indicating the house had been used. He had to assume the fire was suspicious and had referred the matter to the police.
Neighbour Val Reggett said the sound of glass breaking and a "massive roar" woke her just after 4am.
The fire was so intense she could feel the warmth in her bedroom across the road.
The house had been empty and unmaintained for many years, and young people often came and went from it. She had given up complaining about it a few years ago, after it was clear it was neither going to be improved nor removed, she said.
Another neighbour, who declined to be named, said the old weatherboard house was an "eyesore", and was not surprised it had burnt down.
"There were lots of squatters there. You'd see them coming and going all the time."
Lookout Point Station Officer Brian Ellis said it was lucky the building was not close to other houses on the street as the fire would have put them in jeopardy.
Dunedin City Council chief building control officer Neil McLeod said he had received complaints about the 60-year-old house, but unless it was dangerous or unsanitary, councils had little power to do anything about it.
"As a property owner if you wish to have a house and not live in it, you can," he said.
In extreme unsanitary or dangerous situations, the council could have the house demolished with a court order, but before the fire, this was not one of those cases.
The elderly owner had given permission for the house to be demolished, Mr McLeod said.
