Art Market Bust
When will it end? This is the question everyone is asking about the art market: Prices have been on a roll for the last three years, culminating in Lord Thomson's spectacular purchase of Rubens' Massacre of the Innocents for £49.5 million in July. At the same time, stock markets are plunging, the international situation is tense and currencies are jittery. The financial press is full of articles either predicting or pooh-poohing a slump. What about the art market, which so far seems to have been sailing along merrily despite both Sept. 11 and increasingly widespread economic woes?
Simply looking at beguiling prices realized and touted by auction houses might lead one to think that the art market has defied gravity and can continue oblivious of the wider economic slowdown. While such a scenario would be lovely, the truth is it's impossible to imagine. But the slowdown of 2003 is not going to be a repeat of the crash of 1990. Times have indeed been good, but an economic shakeout is not a collapse: The underlying global economy remains healthy--so too with the art market.
The Art Newspaper compiled a list of reasons why a slump might or might not be around the corner--and which is more likely to happen.
Heading For A Bust
Reason #1The plunge in stock markets worldwide has wiped millions off share values, thus eliminating much of the wealth that had been built up over the past few years. This will have an impact on buyers. The effect is already being felt in the middle market, while the trade is also feeling the pinch: No bonuses for finance professionals seem to equate to no demand in the middle market.
As for the top end, while it is true that the rich will always be with us, the virtual closure of new issues on the stock markets closes off the ability of entrepreneurs to realize the value in their companies. This undermines the ability of these newly rich to buy everything from large country houses to the pictures that are intended to fill them.
Reason #2
War is on the agenda. If the U.S. does attack Iraq, it will be yet another excuse for businessmen to sit back and wait to see how events turn out before they have to make a decision. Even if the war is a short sharp success, business investment is likely to take six months to get going.
Reason #3
Property prices are on a roll. And as we know, the last property slump in 1990 saw the art market go down with it. Today, while low interest rates make mortgages affordable, the price of houses has climbed to levels last seen in the late 1980s. High property prices create a feel-good factor which spills over into the wider economy and has underpinned consumer confidence and hence business expansion over the past three years. Even if a housing crash is unlikely, a cessation in rises is going to have an effect.
Reason #4
Overheating: The contemporary art market in particular has shown some signs of overheating, with buyers prepared to pay over-the-top prices at auction for the trendiest names. Sometimes these are double those asked in the galleries. The notion of value in this market seems to have been lost and once-hot artists, such as Damien Hirst, are beginning to see their prices fall. If confidence is shaken, buyers could desert it in droves.
On The Other Hand...
Reason #1No Japanese factor: The last art-market bust was exacerbated by strong Japanese (tax-avoiding) buying, particularly in the Impressionist field. The art market would have undoubtedly suffered a decline if the Japanese economy had not imploded, but while the collapse of IT has hurt economies, no one expects Europe or the U.S. to enter into a ten-year recession.
Reason #2
Interest rates are at rock bottom and are unlikely to rise significantly. So long as money remains cheap, it is difficult to see economies entering a prolonged recession (Japan remains an exception).
Reason #3
Art is increasingly seen as an alternative investment. While this may not be a particularly sensible approach--given market illiquidity and high transaction costs--the rush to alternative assets, which has held up the U.S. and U.K. housing market, has also had a beneficial effect on art. A housing slump may well take the edge off this buying, but like housing, if art enters the field as an alternative asset, it is unlikely to lose that attribute in the longer term.
Reason #4
More buyers: The number of new buyers in the art market has increased markedly over the last ten years, while supply is shrinking. Sotheby's (nyse: BID - news - people ) reported a 21% drop in consignments in the first quarter of this year, and Christie's is thought to be seeing a similar picture. As societies become richer, increasing numbers of people come to collect art, and because supply is finite (except in contemporary art), there is only one way for the long-term trend to go.
Reason #5
The market is selective.
While certain parts of the market are showing bubble-like qualities, most are not. Thus, the current bubble in the contemporary art market may well lead to a nasty shock for some buyers, but auction sales are generally selective. Recent sales have repeatedly seen top lots soaring over estimate, coupled with high buy-in rates--showing that people are buying with care and intelligence.