This time last year, much of the investment community was still convinced that the art market – and particularly the high end of the contemporary art market – would remain utterly unaffected by the global meltdown.
We were told that the super-rich would keep on spending, no matter what happened to the global economy; that the diversified nature of the new art buyers (not just the Russians, but the Chinese and half the world’s hedge fund managers too) would somehow protect prices; that art prices were uncorrelated with the returns from other asset classes; and that the collapse in other asset prices would soon see investors shifting even more cash into art.
For a while last year, the bulls seemed to be winning. In the first half of 2008, prices held up fantastically and, even by the end of a year that had savaged pretty much every other asset out there, the Mei Moses index – which tracks auction prices – had fallen a mere 4.5%.
There is, I gather, a very simple explanation for this. In most art market bubbles, the holders of the most expensive pieces are rarely just art collectors. Instead, they are often tycoons who are heavily leveraged to other businesses and who, in many cases, have secured various borrowings against their Picassos and Hirsts. This means that, in troubled times, they have a very strong incentive to keep art prices both high and rising – something they do by overbidding for other art works at auction.
Say you have five works of art by the same artist valued at £2m each, and borrowings against them of something like £8m, and you need more money to bail out a failure elsewhere. The best way to get it might be to bid up another similar painting by the same artist to £3m – in a stroke making your existing collection suddenly “worth” not £10m but £15m, and allowing you to borrow the extra £5m.
In tough times, it is also in your interest to bid for the similar painting just to keep the established auction price at £2m, rather than letting it fall – and taking the value of all your collateral with it.
In fact, the idea that dealers and collectors are in cahoots to maintain prices was much discussed last year when, in the wake of the huge Damien Hirst auction at Sotheby’s – it turned out that his dealer had bid on more than 40% of the lots.
However, no market can be bid up indefinitely. The Mei Moses index fell 35% in the first quarter of 2009.
So, the great contemporary art boom was just another bubble. There was never a shortage of supply, and demand was more speculative than rational – as perhaps all art investment always is.
The truth is that the art market has pretty much everything you don’t want in an investment.
It is very illiquid: when you want to sell, you have either to find the right private buyer for the artwork or find the right auction, persuade the auction house to take it and then wait for the auction to take place.
It is utterly untransparent: we might be able to see auction prices but who knows what price speculators in a hurry are getting for their works from dealers? It doesn’t pay an income of any kind. It is very fashion-dependent. It is also a poor performer. Unless you happen to get your hands on something by a dead artist (i.e. in genuinely limited supply) that has been recognised as good for some decades by everyone, it is pretty much a guaranteed money loser.
Sure, the indices that track auction prices suggest that art has moved more or less in line with the S&P 500 for decades, but most art never gains enough value to get a place at the kind of auction that index compilers track. There’s no index tracking that sweet painting of fishing boats that you paid £500 for in a little gallery in St Ives a decade ago – and no index tracking what happens to the prices of paintings by the average “emerging artist” over a career.
If there were, I suspect we’d find that “art” as a whole has always underperformed every other possible investment there is.
With these thoughts in mind, I have just bought a painting by Emily Gregory-Smith (see www.newbloodart.com). I can’t imagine I would be able to sell it for what I paid for it (most original paintings are, in this sense, a bit like new cars) and, over time, its value will be entirely dependent on the extent to which other people might agree with me that Gregory-Smith is a fine painter.
If not many people agree, my painting will have no intrinsic value beyond the energy it will create if I burn it. I paid £2,000 for my painting. I don’t expect to make any more money on it than I will from the hard-boiled egg my little girl has just spent hours painting. Luckily, I still rather like owning both of them.
• This article was first published in the Financial Times