Could the art market be undergoing a fundamental restructuring?

2010 will be a year of continued reshaping

Economists have argued that many sectors of the global economy are undergoing a monumental restructuring Nathan Dumlao

Economists have argued that many sectors of the global economy are undergoing a monumental restructuring Nathan Dumlao

In 2005, due to the timely convergence of several factors, the art investment story started gaining traction. A substantial increase in art prices sparked investment ambitions and led outsiders to take note. An excess of global liquidity and the allure of alternative investments combined to attract a new breed of buyer—the “investor-collector” and the “speculative-collector”. Taking stock of today’s art market, many observers are left asking (even in light of some recent high profile prices at the end of 2009): were the significant increases all hyperbole generated by a global asset bubble? If art is truly uncorrelated, as many argue, why did prices and turnover drop so precipitously during the financial market free-fall? And perhaps most important of all, has the market finally hit bottom and started to stabilise?

In making any projections, one must view the art market in the context of the larger global economy. Tracking the performance of other assets, primarily financial, often lends valuable insight as to where the general art market is headed, but one has to be careful about oversimplified comparisons such as the art market lags the financial markets by “X” number of months. It is wealth creation and liquidity that fuel this market, and its absence can have a sudden and dramatic impact on transaction volume and pricing, as painfully witnessed in the 2008/2009 auction season.

“This time is different,” was the mantra of the recent market peak. Collectors were told—unlike the Japanese-driven Impressionist art bubble of the late 1980s—that the most recent run-up in prices was of a completely different nature. This time, those “in-the-know” claimed, buying was more broadly based due to the following three factors: the significant increase in the world-wide “super-rich”; the arrival of collectors from the emerging markets, the Middle East, Latin America, Russia and Asia; and the rising interest in contemporary art among the expanding wealth base in America.

While this argument was in part true, just because new buyers had arrived in large numbers did not mean that they could not also leave in large numbers. Markets can fall precipitously overnight should collectors, “investor-collectors” and “speculative-collectors” change their perception of value, especially in a market which is opaque, unregulated and not tied to an objective, standard valuation methodology.

Just because new buyers had arrived in large numbers did not mean that they could not also leave in large numbers

This vulnerability becomes most apparent when comparing the two-week marathon of Impressionist & Modern and post-war & contemporary auctions in New York in the autumn of 2007 with those from the autumn of 2008—$1.6bn against $729m respectively. The quality of material at auction was comparable; the only missing ingredient was buyer demand, resulting in a dramatic drop in prices and works sold. Lower auction prices combined with the loss of guarantees (inhibiting the owners of important works from selling at auction) further exacerbated the market contraction and the drop in prices. In autumn 2009, total auction sales were only $596m, or less than 40% of the peak (see Art Market Research’s Contemporary Art 100 Index, shown here).

The most recent iteration of the “broad-base collector” premise is that participants are on the sidelines waiting to return once the economy rebounds. Will they? This assertion needs to be evaluated as carefully as the prior theory was not. While many fortunes have been lost or seriously diminished, there is still considerable worldwide wealth. Yet, and maybe of greater importance, the perception of wealth is considerably different now than in 2007 as we have likely seen the disappearance of the “speculative-collector” for the foreseeable future. Several noted economists, including Paul Krugman, have argued that we are undergoing a monumental restructuring of many sectors of the global economy—media, retailing, real estate, automotive and financial services. Will the art market undergo the same transformation?

The global economy is also undergoing a significant deleveraging that a number of economists expect to continue well into 2011. The impact on the valuation of art assets is not yet fully understood. For example, if residential real estate in the US remains at 20% to 30% below its peak, that could have a meaningful drag on the art market.

We are also left asking what will be the long-term impact of the significant decrease in net worth as there has been a tremendous negative impact on leading collectors, foundations and institutions. If previously unassailable institutions, such as the Metropolitan Museum of Art and Harvard University, are forced into draconian cut-backs as a result of staggering declines in endowments and investment income, what does this suggest about the buying capacity of the art industry’s most visible players? And more recently, what will be the ultimate impact of the current debt crises in Dubai on the broader collecting ambitions of that region of the Middle East?

The market in 2010

Limited art market liquidity, global deleveraging and financial market turmoil had a drastic impact through 2009. Yet, it is interesting to note that the upheaval in global financial markets has reinforced the long-standing preference of Indian, Chinese and Middle-Eastern collectors to hold real assets (art, real estate, gold, etc.). Additionally, the emerging economies are recovering faster than those of the US, Japan and Europe. For both of these reasons, the classical Chinese paintings and works of art market, unlike its Western counterparts, has seen a less severe effect from the 2008 financial market turmoil.

Some wealthy individuals, concerned about future inflation or a return of financial market instability, have driven gold prices to record highs. The same concern will drive a number of individuals toward increasing their portfolio allocation to art as an inflation hedge and this could fuel price increases in more well known and higher quality works appealing to more conservative tastes—Old Masters and Impressionist & Modern classics.

Art will always be a tremendously valuable asset and a must-hold for both the connoisseur and “investor-collector”

Art will always be a tremendously valuable asset and a must-hold for both the connoisseur and “investor-collector”. 2010 will be a year of continued reshaping: auctions will remain smaller, private sales will be the preferred method of selling for the majority of collectors, the “best of the best” will garner significant interest and sell well, and second- and third-tier works will be left unsold or see further price reductions. It is no longer a time where a rising tide lifts all boats. However, should there be no significant new shocks to the global economy, the year ahead might just be better than the one behind.

• The writers are principals of Artvest Partners LLC

Art Market Research (AMR) indexes are based on auction sales worldwide. No verifiable data for private transactions being available, AMR indexes provide the most accurate measure of art markets today. Because exceptional prices can distort index movements, we present the graphs on two bases—100% of data and Central 80% [omitting top 10% and bottom 10%], the latter being the preferred measure for the mainstream of each market. The indexes were updated to include important sales in November and December 2009.