Restoring Rationality To The International Art Market

Causes and consequences of art market inflation

There appears to be no ceiling to expenditures, particularly for contemporary art. This is clearly being driven by buyers, both domestic and international, who are determined to acquire “name” artists for the prestige that comes with possession. Aesthetics have gotten lost in the process and all that remains is the obsession to own a work of art–and the more expensive, the better. One rarely hears a discussion about the merits of the artwork but one frequently hears about its price.

Something important is being lost in the whole process. When asked what he would do if his house was on fire and he had a choice between saving one of his artworks or a cat, Giacometti replied, “The cat, of course, because life is always more important than art.” One wonders in today’s world whether a collector would say the same.

These inflated prices would not be so disconcerting except for the fact that there are troubling market consequences, which fall into three areas.

Market Bubble: The art market, like any overheated and inflated market, is prone to result in an artificial and unsustainable bubble. Not unlike Holland’s tulip mania in the 17th century, today’s art market continues to achieve new highs without a sound footing that would support $100 million plus price tags. This means that a sudden turn in taste that finds certain contemporary artists diminished in popularity could burst the bubble.

Shrinking the market for emerging artists: Today’s inflated market makes it hard for young, emerging artists to gain a foothold because the collectors that are driving up prices are in pursuit of artists with a pedigree. This leaves those who are lesser-known trying to get attention in a very noisy atmosphere that presents little opportunity for them.

Lack of investment criteria: In the equities markets, for example, there are investment principles that can be applied and metrics that determine intrinsic, if not absolute, value. In the brave new world of art investing, there are no such metrics other than taste and the pursuit of the latest fashion in collecting. Indeed, in some ways the fashion and the art worlds have collided creating new norms for collecting. What has happened is that the principles of rational investing, which drives equities, cannot be applied to the art market.

The question remains: Is any way to restore a rational art market among collectors jockeying for that trophy piece?

I believe there is–by applying the principles of the equity markets to the art market.

How equity market principles can help

The global equities markets have established guidelines for valuation of companies and their shares. Admittedly, there are financial metrics that are more disciplined and easier to track. But each piece of art has a provenance and history that can become the basis for a global index fund that tracks purchases and sales.

This will allow collectors to look at an individual work of art in a global context with peer group analysis. That facilitates a comparison of prices related to a particular work of art by genre, by artist and from a specific time period. This can become a more level playing field for prospective buyers. The inefficiency of markets are caused by a lack of information that is uniformly available; published data on weekly sales globally can fill the gap that causes prices to gyrate and set the stage for a bubble.

Rational markets seems to be an oxymoron only when seen in the light of individual purchases. But once data is shared and freely available, it can eliminate some of the irrationality of the art market. Equities trade at rational levels precisely because the information is transparent. By applying this principle to art, collectors and auction houses can minimize market gyrations and volatility.

Causes and consequences of art market inflation

There appears to be no ceiling to expenditures, particularly for contemporary art. This is clearly being driven by buyers, both domestic and international, who are determined to acquire “name” artists for the prestige that comes with possession. Aesthetics have gotten lost in the process and all that remains is the obsession to own a work of art–and the more expensive, the better. One rarely hears a discussion about the merits of the artwork but one frequently hears about its price.

Something important is being lost in the whole process. When asked what he would do if his house was on fire and he had a choice between saving one of his artworks or a cat, Giacometti replied, “The cat, of course, because life is always more important than art.” One wonders in today’s world whether a collector would say the same.

These inflated prices would not be so disconcerting except for the fact that there are troubling market consequences, which fall into three areas.

Market Bubble: The art market, like any overheated and inflated market, is prone to result in an artificial and unsustainable bubble. Not unlike Holland’s tulip mania in the 17th century, today’s art market continues to achieve new highs without a sound footing that would support $100 million plus price tags. This means that a sudden turn in taste that finds certain contemporary artists diminished in popularity could burst the bubble.

Shrinking the market for emerging artists: Today’s inflated market makes it hard for young, emerging artists to gain a foothold because the collectors that are driving up prices are in pursuit of artists with a pedigree. This leaves those who are lesser-known trying to get attention in a very noisy atmosphere that presents little opportunity for them.

Lack of investment criteria: In the equities markets, for example, there are investment principles that can be applied and metrics that determine intrinsic, if not absolute, value. In the brave new world of art investing, there are no such metrics other than taste and the pursuit of the latest fashion in collecting. Indeed, in some ways the fashion and the art worlds have collided creating new norms for collecting. What has happened is that the principles of rational investing, which drives equities, cannot be applied to the art market.

The question remains: Is any way to restore a rational art market among collectors jockeying for that trophy piece?

I believe there is–by applying the principles of the equity markets to the art market.

How equity market principles can help

The global equities markets have established guidelines for valuation of companies and their shares. Admittedly, there are financial metrics that are more disciplined and easier to track. But each piece of art has a provenance and history that can become the basis for a global index fund that tracks purchases and sales.

This will allow collectors to look at an individual work of art in a global context with peer group analysis. That facilitates a comparison of prices related to a particular work of art by genre, by artist and from a specific time period. This can become a more level playing field for prospective buyers. The inefficiency of markets are caused by a lack of information that is uniformly available; published data on weekly sales globally can fill the gap that causes prices to gyrate and set the stage for a bubble.

Rational markets seems to be an oxymoron only when seen in the light of individual purchases. But once data is shared and freely available, it can eliminate some of the irrationality of the art market. Equities trade at rational levels precisely because the information is transparent. By applying this principle to art, collectors and auction houses can minimize market gyrations and volatility.