Economists Weigh In on the Art Market

by Daniel Grant

The news from the art trade has been grim

the past year.

Many art galleries around the United States

have closed their doors, and major

and regional fine arts auction houses

have watched sales revenues

and prices go down and the percentage

of unsold lots go up.

Fewer people have been looking

to buy or sell, and

that trend is likely to continue a little longer.

"Top-quality objects continue to do well,

" said Matthew Girling, chief executive

officer of London-based Bonhams,

but "the supply of very good things

has been drying up in this soft market."

As a result, "people are going to auctions

looking for bargains,"

and they are willing to pay only lowball prices.

"For the sort of people buying from us,

confidence is needed," Girling said.

"Their businesses need to be doing well,

and the economy needs to be back on track."

Then, presumably, they'll start collecting again

in the way that they had between 2005

and early 2008. Maybe.

In past years it was a truism that

the art market lagged six to 12 months

behind the rest of the economy.

Collectors splurged on art purchases

for that period of time while the stock market

plummeted or held off from buying until

the financial markets had recovered

for a half or full year.

More recently, the correlation between trends

in the stock and art markets has been higher,

according to Rachel Pownall-Campbell,

an assistant professor of finance

at Maastricht University in the Netherlands

and an advisor to The Fine Art Fund

in London, a hedge fund investing solely in works of art.

"There is more interdependence than

there used to be," Pownall-Campbell said,

attributing this in part to "people in the

finance industries who also invest in art.

We saw most recently these markets

falling at the same time and

at the same rate, in large measure."

As a growing number of economists predict

that the U.S. economy will come out

of the recession later this year (perhaps

heralded by climbing share prices

on the New York Stock Exchange

over the past few months),

the opportunity for a rebound

in the art market also could be in the offing.

One test may be seen on November 4

in New York City at Sotheby's evening sale

of Impressionist and modern art.

Sotheby's will offer seven paintings

from the Paul Durand-Ruel collection

from France.

The combined estimated value

is $8.9/12.6 million.

These artworks include Pierre-Auguste

Renoir's Woman with a White Hat

(est. $2.5/3.5 million), Camille Pissarro's

The Boieldieu Bridge and Orleans

Train Station in Rouen on

a Sunny Day (est. $2/3 million),

and Alfred Sisley's The Seine

at Argenteuil (est. $1.5/2 million).

Beginning in September the seven paintings

will be exhibited in Paris, Hong Kong,

London, and then New York City

prior to the auction.

The U.S. dollar is still low relative

to the British pound and the euro.

Possibly U.S. buyers will snap up some

or all of these paintings,

but Sotheby's hopes through these maneuvers

that foreign collectors will see them

as bargains, and that Americans

will at least spur some competitive bidding.

William Goetzmann, director of the

International Center of Finance at

the Yale School of Management,

claimed, "The key indicator to watch

is how the markets and institutions

fare at the very high end.

For example, the profits on Wall Street

and the recovery of the hedge fund

industry are good indicators that

high-end art buyers will feel

more comfortable investing in art.

The calming financial markets also

suggest that major investors

could begin to turn their

attention back to collecting."

As a caveat, however, Goetzmann noted

that it is unclear "whether the culture

of collecting may have changed

as a result of the criticism

of excessive compensation.

With bankers and hedge funds

still under criticism and scrutiny in Europe,

it may make investors from

these sectors wait until

the adverse publicity blows over."

Corporate profits for publicly owned

companies is one of the key indices

on which Christie's bases its forecasting.

The auction house also is "in touch with

our own bankers, clients who

are bankers, and contacts in different

parts of the world," according to Paul Provost,

director of trusts, estates, and appraisals

for Christie's New York.

There is no single index that follows

the art trade, he noted, but he tracks

the market for "high-end residential

real estate" as indicative

of the financial health of would-be clients.

The market for high-end residential real estate

has suffered greatly relative to "low-end housing,

where prices increased at a much higher

percentage during the boom period 1997

to 2006 and where all the foreclosures

are now," said Donald R. Haurin,

professor of economics at Ohio State

University and board president of

the American Real Estate

and Urban Economics Association.

"Prices went up for high-end real estate

during that boom period too

but not relatively as much or as fast.

Prices are probably being lowered

for these properties, but the wealthy

have delayed selling properties—if

they can delay—until prices

return to higher levels."

Major sales are slated at the auction houses

in November, but because these sales

were put together months in advance,

they are likely to represent

the worries of past months rather

than any newer optimism,

according to Donald Thompson.

Thompson is a professor at

the Schulich School of Business

at York University in Toronto

and the author of The $12 Million Dollar

Stuffed Shark: The Curious Economics

of Contemporary Art (2008).

Fewer lots continue to be offered

in the upcoming sales, "all with

as low estimates as they can manage."

Of late, the percentage of sold artworks

in these sales has risen,

but Thompson attributes this

to the fact that "so many

of the lots being offered

carry irrevocable bids

that serve as guarantees."

An irrevocable bid is one

that is promised before the sale

at a given price, ensuring

the lot will sell.

"That is one reason the lots

are being offered."

He does not expect that we will

see "price levels for art anything

like eighteen months ago.

The very best museum-quality items

will sell at 2003-2004 level prices"

only "because some wealthy

new museums" (such as those

in Abu Dhabi, Qatar) "are

still buying.

Anything aggressively

priced will struggle."

There may be opportunities

in this crisis for buyers

who can sniff a bargain.

"The next two years will be

the best time to buy," said Philip Hoffman,

director of The Fine Art Fund,

"because there will be distress sales,

and some sellers are going

to be willing to take thirty percent less"

than what they might have earned

as recently as early 2008.

Sometimes, even more than 30%.

Deborah Davis, a New Jersey art advisor,

noted that she recently helped a client

who needed to raise money

sell two works from his collection—an

early 20th-century American photograph

and a lithographic print by

Pop artist James Rosenquist—for $45,000

and $6000, respectively.

That's 40¢ to the dollar when compared

with what she would have expected

in the first half of 2008.

"There are a lot of people looking

to sell these days," Davis said.

Some galleries of contemporary art

mention to her the possibility

of significant discounts, even before

she indicates an interest

in buying anything.

"They never did that in the past."

That 20th-century photograph was sold

to an art dealer, and the Rosenquist print

went to a private collector.

Davis noted that the seller chose

not to bring them to Christie's or

Sotheby's because "they don't give

guarantees anymore, and they won't take

something that isn't star quality."

(A guarantee, used as an enticement

to obtain consignments,

is a promise that the auction house will

sell the item at or above a certain price

or purchase the piece itself.)

The high percentage of unsold auction lots

over the past year, sometimes

reaching 40% or higher,

is embarrassing to the auctioneers

and damaging to the future sales prospects

of the artworks.

As a result, the major auction houses

are holding smaller and fewer sales,

turning away pieces less likely

to find buyers, and

lowering estimates to lure bidders.

Many art galleries are undergoing a degree

of retrenchment-reducing prices

or increasing discounts, holding

fewer exhibitions, maintaining smaller staffs,

and perhaps attending fewer art fairs,

especially those on other continents.

"The overhead in the gallery business

is enormous," said Roland Augustine,

a Manhattan gallery owner

and president of the Art Dealers Association

of America.

Attending the annual June Basel Art Fair

in Switzerland, for instance,

cost his gallery $300,000 for crating,

shipping, and insuring artwork,

for gallery staff travel and accommodations,

for booth design, and

for entertaining clients.

("We made back our costs," he said.)

Overall, the monthly cost of running

Luhring Augustine Gallery, with its

18 full- and part-time employees,

is $350,000.

He estimated that the average monthly

overhead of smaller galleries with only

three or four employees

is at least $35,000 to $50,000.

In some cases galleries have been

able to renegotiate their rents downward.

There is less talk of "waiting lists"

for sought-after artists-getting

on a gallery's waiting list had often

involved purchasing artworks

from several exhibitions in order

to prove one's commitment to

the gallery-and precipitous price rises

aren't as likely for art by acclaimed artists.

"The process of restructuring the

art market will be more protracted

than anyone likes to admit," Augustine said.

The economic recovery will likely

be accompanied by some degree

of inflation, since governments around

the world, particularly the U.S.

and the U.K., have been pouring

tremendous amounts of money into

their economies through bailouts,

low-interest-rate loans,

and stimulus efforts.

It is not clear if inflation will have

a positive or negative impact

on the art market's recovery.

"Inflation is an indicator of

an expanding economy," said

University of Chicago economics

professor David Galenson,

and the optimism generated by expansion

tends to be bullish for all markets.

In addition, at times of rising prices artworks

have been purchased as a hedge

against inflation,

which makes activity in the art trade

twice as likely.

Simon de Pury, chairman of Phillips

de Pury & Company, noted that

"back in the 1970's, when there was

considerable inflation, it proved to be

a good thing for the art market."

One of the winners during that period

was the British Rail Pension Fund,

which invested $100 million (2.5%)

of its portfolio into the purchase of

a wide range of decorative and fine art,

such as African tribal artifacts,

Chinese porcelain,

and French Impressionist paintings.

Between 1987 and 1999 the fund sold

all its art assets, and the returns

represented an annual compound

interest of 11.3%.

On the other hand, inflation that exceeds

economic growth "is a negative,"

said John Silvia, chief economist

for Wachovia, because it hampers growth

by making it more expensive

for businesses to expand.

The high cost of money limits

"the availability of credit, which affects

art buyers, as well as

home buyers and business owners," he said.

Another drawback of inflated amounts

of money paid for artworks,

according to Gianfranco Mossetto,

chairman of the department of art

and cultural economics

at the University of Venice, Italy,

is that "prices could increase

independently of the quality

of the art," especially as investors

seek tangible assets such as art

for a hedge against inflation.

Overpriced art—a new

bubble—could be in the making.

Originally published in the October 2009
issue of Maine Antique Digest. (c) 2009
Maine Antique Digest

Link here

             J-L K.
Procurement Consultant
Gsm:    (250) (0) 78-847-0205 (Mtn Rwanda)
Gsm:    (250) (0) 75-079-9819 (Rwandatel)
Home:  (250) (0) 25-510-4140
    P.O. Box 3867
  Kigali - RWANDA
    East AFRICA
Blog: http://cepgl.blogspot.com
Skype ID: kayisa66

No comments:

Post a Comment