The art market turns ugly

Picasso’s Les Femmes d’Alger © Alamy
Picasso’s Les Femmes d’Alger fetched $179.4m

Art has been a popular and successful investment since the 2008 crisis – but now there are jitters in the market, and not just over the bubbly prices. Simon Wilson reports.

Has the art market peaked?

Probably. Since the 2008-2009 financial crisis, investing in art has proved a winner – particularly contemporary art, which has doubled in value. Specific segments of the market have boomed beyond all rational explanation and are well into speculative bubble territory. For example, the emerging genre of “zombie formalism” – art that is essentially just shinily attractive and lacking in any representational or narrative content, and is thus perfect for trading as an asset class – saw prices shoot up wildly before deflating last year.

We also saw some record auction prices being achieved ($179.4m for Picasso’s Les Femmes d’Alger; $170.4m for Modigliani’s Nu couché), as well as even higher reported prices for (harder to verify) private sales – including a Gauguin and a Willem de Kooning for $300m each, and a Jackson Pollock for $200m. Yet overall in 2015 the art market shrank.

How much has it fallen by?

According to the most widely cited survey of the global art market, an annual report by The European Fine Art Fair (TEFAF), the global market contracted by 7% in 2015, with worldwide sales of $63.8bn. That’s 7% lower than the record high of $68.2bn achieved in 2014. The figures are compiled for TEFAF by art economist Dr Clare McAndrew, and include auction sales (for which figures are relatively easy to obtain) and sales by dealers (which are self-reported, and therefore less reliable).

The main source of continuing strength in the market is America, which accounted for 43% of total sales (up four percentage points on 2014). The next-biggest markets are the UK (21%) and China (19%), but both shrank in 2015. China saw a serious slump of 23% on McAndrew’s figures, while the UK market fell by 9%.

And this year?

The downward trend seems to be continuing. The big London sales in February saw markedly less bullish trading volumes and prices. And last month, in the most hectic trading week of the art market year, Sotheby’s, Christie’s and Phillips in New York sold $1.1bn worth of Impressionist, Modern and Contemporary art. That might sound a lot, but the equivalent total last year was $2.7bn.

The nervousness in the market is being driven, say analysts, not just by jitters over the direction of the global economy – and in particular the collapse of confidence in Brazil and China – but by the growing sense that, more than ever, the opacity of the art market makes it a legalised form of insider trading, where nothing is quite what it seems.

Is there insider trading in art?

Take the role played by auction houses. Are they merely disinterested market makers facilitating the coming together of sellers and buyers? Or are they market participants – in effect dealers, who use perfectly legal but decidedly opaque tactics to maximise revenues and profits on the paintings they are dealing in?

The surge in the number of works being sold in which auction houses have a financial interest, and the use of third-party “guarantees” to sellers, means that increasingly art market analysts see them as the latter. In order to attract custom at the high end of the market, auction houses – including the big two, Christie’s and Sotheby’s – increasingly pre-accept “guaranteed” minimum bids from anonymous collectors or dealers.

How does that work?

Guarantors undertake to a pay an agreed base price, but may also then participate in the public auction, and – under a byzantine fee structure – take a slice of the profit if they don’t end up as the buyer. To complicate things, the auction houses also lay off some of the risk on the most valuable works to dealers or collectors, who put up their capital in return for a fee.

All this means that it’s possible, for a sophisticated collector, to get a decent return simply by acting as a guarantor, and relatively easy artificially to prop up the market in a particular artist (and even get a fee for doing so).

Why does all this matter?

Clearly, it doesn’t much matter to anyone if a billionaire is overcharged a few million for a luxury object whose value depends solely on what someone is willing to pay. That’s the accusation levelled by Russian oligarch Dmitry Ryboloblev against Swiss dealer Yves Bouvier in a notorious long-running legal case, involving claims that Bouvier charged Ryboloblev hundreds of millions pounds more than he paid for 40 major works (Ryboloblev says he thought Bouvier was his agent, charging a 2% commission; Bouvier says he was merely a dealer).

And, of course, art auctions have always been partly about smoke and mirrors, notorious for “chandelier bidding” (imaginary bids) and the like. But what does matter is that the opacity of the system – the fact that even at a public auction the published price is not the price actually paid. This makes the entire market vulnerable to price gouging, ramping and outright fraud – and potentially even money laundering and tax evasion.

Is art a sound investment?

Art is often described as a useful means of diversifying an investment portfolio. In reality, like many other supposedly “uncorrelated” asset classes, it did not live up to that billing during the financial crisis of 2008 and the stockmarket crash of the late 2000s – prices still fell.

Moreover, transaction costs are high, at up to 4%, making art a notably expensive (and illiquid) asset to trade. What art has going for it is that it is tangible, easily moveable, and easily storable in modern “free port” warehouses – all attractive qualities for people rich enough to worry about mitigating their tax liabilities in different jurisdictions. But nowhere is the old warning “caveat emptor” more apt. As the artist and critic Walter Robinson – coiner of the phrase “zombie formalism” – puts it: “Since the entire market is entirely irrational, it can’t be rationally interpreted.”