After half a decade of unprecedented growth, the art market has been brought back to earth. Recent results from London contemporary auctions confirmed the fear that the art market is in for a correction. A total of £51m was raised in the evening sales, against a low estimate of £105m (51% below the low estimate). A total of 15 lots were sold for a discount of 30% to 60% of the low estimate, signalling that a major price adjustment is underway for a number of artists.
So was this a surprise? In November 2007, the ArtTactic Art Market Confidence Indicator fell 40%, signalling a significant change in sentiment from the previous reading in May 2007, largely caused by a gloomy outlook on the economy. The correction started in autumn 2007, but record volumes and prices at the top end of the contemporary art market disguised the fact that the trouble had already started further down the value chain. The first real sign that the art market was feeling the heat of the financial crisis came on 8 November 2007. The Impressionist and Modern sale in New York took in just under $270m, falling short of its low pre-sale estimate of $355m. The sale sent Sotheby’s share price down 28%, a slide that has continued until today—reducing Sotheby’s market capitalisation to $580m, down from $4.2bn a year ago.
In June 2007, ArtTactic’s Auction Indicator (measuring the relationship between the number of lots selling above the average estimate) changed direction, and fell 48% by May 2008. This was an early sign of what has become the market’s biggest problem—the failure to adjust estimates and expectations in light of the global economic environment. The hubris caused by ever-rising prices and high expectations of sellers forced the auction houses to be over-aggressive in setting their estimates, and limited their ability to adjust to the situation.
But why did the art market believe it was a “special case” that somehow operated independently of what was going on? It rested on one argument: the rapidly growing number of high net worth individuals in emerging markets, such as Russia, India, China and the Middle East. This new wealth had been building the foundation for art market booms in their own countries, and the increasing participation of these new buyers in Western auctions was going to substitute for the wounded Western buyers, hit by the financial turmoil and credit crisis. It worked, for about a year. But when the latest bout of turmoil in September 2008 also sent emerging financial markets (and art markets) into a tailspin—the foundation on which the “special case” argument was built suddenly vanished.
So what’s next? Is the future of the art market that bleak? No, this will be a market for new opportunities. Major collectors are waiting for prices to come down 30% to 40% from their peak, a correction that was already evident in the latest round of auctions in London in October. Certain works by artists such as Yue Minjun, Rashid Rana, Banks Violette, Anish Kapoor, Damien Hirst and Takashi Murakami were selling for 30% to 60% below the low estimate. Further pressure on prices is expected, and it will take some time before the market has reached equilibrium.
We all know what the last crash in 1991 did to hotshot artists such as David Salle, Julian Schnabel, Eric Fischl, Francisco Clemente and Sandro Chia. Their markets took 15 years to recover...
Now the question is: which artists will survive the adjustment? We all know what the last crash in 1991 did to hotshot artists such as David Salle, Julian Schnabel, Eric Fischl, Francisco Clemente and Sandro Chia. Their markets took 15 years to recover, and in real terms (adjusted for inflation) are still considerably below their peak, but at least their markets survived. Other stars of the time were not so lucky—history is likely to repeat itself.
The primary market is also likely to regain the balance of power compared to the auctions. The auction houses have dented their credibility as money-making machines, and would-be sellers are realising that the liquidity is quickly evaporating. In a falling market, the focus will again be directed towards the galleries that have proved their commitment to their artists.
In the end, a correction is healthy for the sustainability of the future art market. The interest in art will not disappear, art and artists will not disappear—if anything, a tougher environment will be more conducive to artistic creativity, and hopefully the market will go back to focusing on what constitutes the real value of art, as art history is rarely made in the auction rooms.
• Anders Petterson, founder and managing director, ArtTactic.com
Originally appeared in The Art Newspaper under the headline "Tough times will provide opportunities"