HOW LONG CAN THE ART MARKET WALK ON WATER?

How long can the art market walk on water?

The wealth of the super-rich is keeping the miracle going but mostly for the best works

By Charlotte Burns. Market, Issue 237, July-August 2012

Published online: 05 July 2012

The top end of the art market appears to keep climbing, despite fresh crises in the currency and banking markets and ongoing turmoil in the Eurozone. The reportedly strong sales at Art Basel (13-17 June) indicate a buoyancy bearing little relationship to the problems in the global economy and the fact that major financial institutions are still struggling with risk management—J.P. Morgan was one of several banks to be downgraded by the credit agencies in June after losing $2bn in trades of illiquid credit derivatives. Meanwhile, according to a report in the New York Times, the growth of the art market is outstripping GDP (gross domestic product).

The $78m price tag for Untitled, 1954, a large orange canvas by the late Mark Rothko offered by Marlborough Gallery at Art Basel, was both a statement of intent and an indicator of confidence, at least at the very top level of the market. Works of this quality are rarely offered so openly by dealers, but the piece had been coaxed out of a private Swiss collection after the record-breaking $86.9m sale of another work by Rothko, Orange, Red, Yellow, 1961, at Christie’s a month earlier. “The best art has proved resilient.

Art Basel, and the quality it purveys, proves rather reassuring in such turbulent times,” says Andrew Renton, the director of Marlborough Contemporary. The 1954 Rothko was yet to find a buyer as we went to press, though Renton says that there are “very serious offers under discussion”.

Remarkably, 11 of the top 20 works ever sold at auction have hammered down since 2008, including the top three lots, which have all sold for more than $100m since 2010. New records have also been consistently set for individual artists. There was excitement at Christie’s sale of contemporary art in London on 27 June when a record £12.9m ($20.2m) was paid for Jean-Michel Basquiat’s Untitled, 1981, breaking the previous record of $16.3m, set in May at Phillips de Pury in New York. This came 22 lots after a new record was set for a work by Yves Klein, when Le Rose du bleu (RE 22), 1960, sold for £23.6m ($36.8m), edging past the $36.5m record paid at Christie’s New York—again, just a month before.

According to Benjamin Mandel, an economist at the Federal Reserve Bank of New York who has been studying the art trade, comparing the overall economy and the art market is misguided: it is the fortunes of the super-rich that should be used as the measure at the highest end. “The historical relationship between the global economy and art purchases is pretty normal at present,” he says. “The fraction of income that the super-rich are spending [on art] remains consistent—they just happen to have more money.”

Changes in wealth distribution since 2008 mean that the number of high-net-worth individuals (commonly defined as having at least $1m in divestible assets) reached its highest ever level of 11 million last year, holding an estimated $42 trillion in net wealth, according to a report by Capgemini/RBC Wealth Management. Following in the footsteps of wider economic changes, the very top of the art market is enjoying rude health while the middle is struggling. At the recent London sales of impressionist and modern art, Joan Miró’s Peinture (Etoile Bleue), 1927, made a record £23.6m, but works of lesser quality were shunned.

The geographic concentration of wealth has expanded, too, and this is having an impact on traditional investments. In newer econ­omies with more volatile, or less mature, financial markets, the rich spend more on luxury assets, including art, jewellery, wine and cars. According to a recent survey of 2,000 of the world’s super-rich individuals by Barclays Wealth, respondents in the United Arab Emirates hold 18% of their wealth in such assets, closely followed by the Chinese and Saudi Arabians (both 17%) and the Brazilians (15%)—compared with 9% of Americans, who tend to focus on more traditional investments.

Buyers from China and Qatar are entering the trade at this luxury level: they account for at least a quarter of the top 20 works sold at auction. There has been a parallel boom in private sales, including the reported $250m acquisition of Cézanne’s The Card Players, around 1893, by Qatar last year. The expansion is not without problems, however. One of the most expensive works to sell at auction, an 18th-century Qianlong-dynasty porcelain vase that went for £51.6m ($83m) in 2010 at Bainbridges Auctions in England, is a record only on paper—the buyers have yet to pay for it.

Although many of the buyers might be new, they are largely ­adhering to the traditional tenets of the trade: provenance, rarity, condition, supply and demand. Ten of the 11 record works sold since 2008 came from a named, established seller. “In the previous boom, between 2006 and 2008, people were more risky about what they were buying, but now they are looking for things with a historical footprint,” says the art economist Clare McAndrew. “Art at that level is an infrequent purchase, and an easy way to reduce your risk is to rely on established patterns set by other people. This is why people tend to be influenced by what others are buying, which reinforces the idea that some artists are the best.”

Sotheby’s 2007 auction of Rothko’s White Centre (Yellow, Pink and Lavender on Rose), 1950, is a testament to the power of provenance. The work belonged to David and the late Peggy Rockefeller. Because the proceeds were going to charity, David Rockefeller agreed to be photographed on the cover of Art + Auction magazine: the work sold for a then-record $72.8m. The next evening, Christie’s sold a Rothko comparable in size and date, albeit with less dramatic colouring and a less impressive provenance, which went for $29.9m. This is noted in the recent book The Value of Art by Michael Findlay, a director of Acquavella Galleries and former head of Christie’s impressionist and modern department. Pointing out that such prestigious pedigree is unusual, he argues that “if something is great, provenance isn’t actually necessary—it lends more value to works of secondary quality, because the buyer will boast about the name if it is of note.”

Unique works are not always the record-breakers; the top three works sold at auction so far are serial pieces. Giacometti’s Walking Man I, 1960, which was briefly the world’s most expensive work at auction when it sold for £65m ($104.3m) in February 2010, was cast in an edition of eight. It was overtaken three months later by the $106.5m paid for Picasso’s 1932 Nude, Green Leaves and Bust. The painting is part of a celebrated series that includes Le Rêve, 1932, which sold to the hedge-fund manager Steve Cohen in 2006 for $139m (before its owner, Steve Wynn, called off the deal after accidentally sticking his elbow through the canvas). Edvard Munch’s The Scream, 1895, took the top slot in May when it sold for $120m—the work is one of four versions.

The serial context provides reassurance for buyers and an associated value. It also indicates a conflation of rarity with supply: although there are four versions of The Scream, the others are in public museums and unlikely to come to the market. “Supply is what drives buyers to go higher,” Findlay says. “There are lots of Monet Haystacks, but the opportunity to buy one would be unique because they are all in institutions.” Such limited supply fuels demand. “It takes at least 30 years, on average, for a work to come onto the market if it is in private hands, and these supply dynamics have worked in the market’s favour,” McAndrew says. “Art is a level above luxury goods: prices can catapult with the knowledge of a work’s scarcity because the super-rich compete to buy one piece.”

While condition is key, the definition of “good” varies according to the work. A Donald Judd in great condition means something quite different to a top-notch work by Rembrandt. “It’s all relative. An impressionist painting from 1880 in great condition may be relined, it may have frame abrasion on the edges—but those things are normal,” Findlay says.

The pursuit of blue-chip works has gained momentum because of the turmoil in other markets. “Art is portable and liquid, and can be traded in different currencies,” said Andrew Fabricant, a director at the Richard Gray Gallery, speaking during Art Basel. However, although blue-chip works are seen as safe havens, “the longer-term trend is that they tend to underperform compared with the rest of the market,” Benjamin Mandel warns.

The investment value of art is difficult to track: the art market comprises a series of mini-markets, each performing differently. The trade is lightly legislated, largely private and lacks the underpinning structure of, for example, a stock exchange. Nonetheless, using publicly available auction data, Mandel found that “the patterns of long-run returns for works of art don’t really conform to the definition of a good investment—the average return is very low, around 2% to 3%, and the volatility of those returns is very high.” He believes that the market can be better understood with the introduction of a “conspicuous consumption” model. “Art acquisitions are not only about the quality of a work and the price,” he says. “If a work hangs on a wall, then the buyer gets a ‘consumption flow’. They also get some benefits as a signal of the price they paid, so if you formalise that in a quantitative sense, it helps explain the financial sums.”

Mandel is reluctant to make predictions, but says that “if income inequality continues to increase, then you might expect to turn a profit at the top end of the market. But, on the other hand, if you’re buying a work as an insurance against losing money in other assets, it’s not clear whether the trend might reverse itself once the global economy looks more normal.” 

It is worth bearing in mind that the close correlation between regional prosperity and growth in the art market is not a new phenomenon. The $82.5m that the Japanese paper magnate Ryoei Saito spent at Christie’s in 1990 on Van Gogh’s Portrait of Dr Gachet, 1890, equates to $145m in today’s terms, which means it theoretically reigns as the most expensive work at auction. The art-market boom in the late 1980s was fuelled by newly rich Japanese on an art-buying spree. This stopped abruptly in 1991 with the collapse of Japanese property prices and sparked an entrenched art-market recession. If the current slowdown in China accelerates, for example, this could have a major impact on the trade.

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