Is the art bubble about to pop?

Van Gogh sold just one painting in his entire life. And it seems the market for the Dutch artist may have dried up again. His Wheat Fields, along with another quarter of the lots on sale at Sotheby's (BID) impressionist and modern art auction in New York last week, refused to budge, costing the auction house which had guaranteed prices to some sellers more than $14m. Its share price fell 36% as investors feared the art bubble was bursting after eight years of non-stop price rises.

As an indication of where the art market is headed, Sotheby's share price is as good a guide as any. It peaked in 1989 before collapsing the following year, along with the rest of the market. And with contemporary art prices up 55% and modern art 44% this year alone, long-time art buyers, with one eye on the credit squeeze, have decided they've had enough. "A lot of traditional buyers... are looking at these kind of prices... and thinking to themselves let's just hang on here, we're not going to get involved in this'," says Michael Benson, director of Candlestar, a London-based dealer.

Overall, the auction raised $269.7m, well short of JMP Securities LLC analyst Kristine Koerber's estimate of $401m to $557m. "It was clear that it wasn't just several paintings that failed to draw bidders, but most of the paintings," she said. Even those that did sell failed to meet their estimates. Paul Gauguin's portrait of a Tahitian woman, Te Poipoi ("The Morning"), went for $39.24m it had been expected to sell for $40m-$60m.

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But for every buyer fleeing, there's another two "coming into the market fresh for the first time", says Philip Hoffman of the London-based Fine Art Fund. "I've just been speaking to some of the big Greek shipowners and they're saying shipping is having one of the biggest booms in ten years, we're putting our money into art'. You talk to the Chinese in Hong Kong, the Indians and Russians, and they are creaming money out of industry and putting it into art," he says. "If you add all that together, the effect of the credit crunch on those people is negligible."

Indeed, a study by Sotheby's found that of its top 500 buyers over the past five years, less than 10% were involved in the financial services industry. It's this new money that's been driving up prices. In the year to June 2006, "$5.9bn-worth of art was auctioned off in 144,000 lots", says the New York Sun. But those dramatic figures pale next to the numbers for the 12 months ending in June 2007. During that period, $9bn worth of art sold at auction in 165,000 lots, says the newspaper. "That's a 52% increase in value with only a 14% rise in volume."

Certainly, despite the poor showing at the Sotheby's auction, the art bubble may not have popped just yet. A Christie's contemporary art auction in New York on Tuesday night saw several paintings fetch record prices. A 1955 blue-and-orange canvas by Mark Rothko went for $34.2m. But buyers are getting fussier. All eyes were on Andy Warhol's Liz Taylor, bought by Hugh Grant six years ago for $3.6m, and widely seen as a poor example of a Warhol. The estimate was $25-$35m. In the event, it went for $23.7m, having attracted just two bids. Overall, the auction raised $325m, about midway between the $271m and $373m hoped for solid, but not spectacular.

The market may have a more diverse group of buyers, but those attracted to an asset because it's in fashion tend to get bored when the easy money dries up. "There are people coming to the market who haven't traditionally been there," says Benson. "Sooner or later, they'll switch their attention to something else." With the credit crunch threatening to turn into a US recession, all that new blood in the market may soon find bigger things to worry about than falling art prices.

What happened the last time

Whether talking about hairstyles or equities, the 1980s was a decade of excess. Nowhere was this more so than in Japan, where speculators drove the property and stockmarkets to previously unheard of levels. And just like today, bubbles in every other market blew into the art world.

Between 1987 and 1991, Japan imported around $9bn worth of art from around the world. Low interest rates and easy money once again fuelled incredible price rises as speculators were allowed to borrow heavily to invest in artworks, which could then be used as collateral to borrow more money to invest in yet more art.

In 1990, Ryoei Saito, the 75-year-old honorary chairman of Daishowa Paper Manufacturing Co, paid what was, at the time, the highest price to date for a painting when he bought Van Gogh's Portrait of Dr. Gachet for $82m. Then just a few days later, he spent another $78.1m on Renoir's Au Moulin de la Galette. But this marked the top of the market.

The Bank of Japan had been raising interest rates to curb inflation since 1989. They peaked at 6% in 1990, but this was enough to rein in the party. The property and equities bubbles deflated explosively and the art market rapidly followed. Many former art lovers went bankrupt, with their collections ending up stacked in bank vaults, having been repossessed after their owners failed to repay their loans.