The Art Newspaper

What crisis? Super rich are still buying

The financial turmoil has been an incentive rather than a barrier for the wealthy to buy art

By Olav Velthuis. Opinion, Issue 230, December 2011
Published online: 15 December 2011

The BRIC-effect: Russian billionaire collectors such as Roman Abramovich (far left) and Leonid Mikhelson (far right) aren’t feeling the pinch

On the day the endgame of the euro area began, only hours after Italian debt markets came under heavy attack, and at the very moment that the New York Stock Exchange was plummeting more than 3%, Sotheby’s evening sale of contemporary art on 9 November totalled an impressive $315.8m: 17% above its high estimate, and close to the peak for contemporary art, which was reached just before the financial crisis of 2008. While the New York auction weeks had a bad start with Christie’s evening sale of impressionist and modern art on 1 November, where more than one third of the lots failed to find a buyer, in general they showed no signs that the debt crisis is having an impact on the art market.

What explains the art market conundrum? Let’s first of all note that, historically, financial or economic turmoil has never prevented the art market from reaching its highs. Van Gogh’s Irises set a record price of $54m in November 1987, a couple of weeks after Black Monday, when almost a quarter of the Dow Jones’ value was erased. The famous sale of the New York taxi tycoon Robert Scull’s collection, which set a record for many contemporary artists in 1973, came in the middle of a long, steady decline of the stock market, and only a day after the Opec countries frightened the West by agreeing to their oil embargo. In 1931, banking panics in the US and the decline of the gold standard did not prevent Andrew Mellon, who was at the time the US Secretary of the Treasury, buying Raphael’s Alba Madonna, around 1510 (now in the National Gallery of Art in Washington, DC), from the Hermitage in St Petersburg (formerly Leningrad) for a then record of almost $1.2m.

What held for these historical precedents holds for the current art market conundrum as well: economic and financial crises go only so far in depleting the cash of wealthy collectors. According to Forbes’s rich list, there are 1,210 billionaires—200 more than last year. Their combined net worth is $4.5 trillion (up from $3.6 trillion). If only a tiny fraction of this wealth is used to pursue status goods like art, the price of conspicuous consumption will be driven up.

For art collectors like Arnault, Abramovich or Pinault, who according to Forbes each have more than $10bn, $10m for a painting by Richter or a sculpture by Koons is in the end no more than 0.1% of their net worth. For an American citizen, whose mean net worth is $96,000 according to data from the Federal Reserve, the equivalent would be paying no more than $96 for a work of art.

So how come there is still so much wealth around? First of all, while the stock markets may have performed poorly this autumn, they have actually done very well since the aftermath of the financial crisis’s first stage. The Dow Jones index has risen more than 70% since its low in early 2009.

Secondly, the majority of the world’s major art collectors are not that dependent on financial markets to begin with. During the market’s boom years (say 2004-08) it became commonplace to point at hedge funds and Wall Street as the art market’s new engine. But the fact is that of the world’s top 200 collectors ranked annually by Artnews magazine, only seven operate hedge funds, while another 13 earn their income in finance or finance-related industries.

Thirdly, while Europe (surely) and the US (maybe) will have to face their second recession in three years, the rest of the world economy is still going strong. In fact, the majority of the world’s new billionaires now come from Brazil, Russia, India and China (BRIC). It is therefore likely that the November auctions have profited from a BRIC-effect. While few buyers have been identified at the auctions, it is telling that the undisputed auction star was Gerhard Richter, whose eight paintings at Sotheby’s evening sale on 9 November totalled $74.3m. According to The Economist, Russian and Chinese collectors have been the main buyers of his work at recent auctions. Among the new Richter aficionados are the Russian energy tsars Roman Abramovich and Leonid Mikhelson.

A final explanation for the art market conundrum is that investment opportunities are currently few. Stock markets are down because of the latest crisis, rates on savings accounts are low because of central bankers’ efforts to avoid a recession. No need to say that government bonds are no longer an option. Gold has always been a safe haven, but of late the market has become a new province of risk takers. In fact, the recent volatility of gold prices has left market analysts wondering if the metal is about to lose its traditional role as a store of value. While the art markets are not deep and liquid enough to take over this role, it seems safe to say that the financial turmoil has been an incentive rather than a barrier for the wealthy to buy art.

Illustrating this point is a dialogue between Sotheby’s chair of contemporary art, Europe, Cheyenne Westphal, and an unnamed American collector as reported in the Wall Street Journal in June 2010: “I phoned him up and told him: ‘Do you realise that in the present market we can get you $50m for your Rothko?’ There was a very long silence at the other end of the phone. Eventually he replied: ‘Well, Ms Westphal, that sure is tremendous news. But what the hell would I do with $50m in the bank?’”

The writer is an associate professor in the department of sociology and anthropology at the University of Amsterdam