The pretesselated displacement will not work if the object has multiple materials assigned to different triangle groups (in other words, if the displacement is assigned to some part of the object). It's the limitation of tesselation algorithm unable to create unweld vertices on neighbor edges. But, it shouldn't crash and suggest "on-the-fly" method.

-Edit: I may be misleading and maybe this is not a limitation anymore. Because, now I saw my own internal bug report which I closed myself some time ago. :P We definitely need to check it because, even on-the-fly is now crashing...
Yes, I am very sure that this is a 2.7 bug involving displacement vs. triangle groups: both pretess and on-the-fly work fine in 2.6.10, and both crash in 2.7.

Coming from SketchUp, almost every mesh ends up using triangle groups; SketchUp users who read this topic should see this post for a tiny Ruby script that helps to remove per-face material assignments, so that they do not override a displacement material assigned at the group level. Without that, it can be difficult (not to mention tedious) to remove every front and back material from all group faces.
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