Art Market Report, 2009

Well, here we are. The bubble that we have been chronicling for years in these annual state-of-the-market reports has finally burst. The art world has followed the rest of the economy in its downward spiral, with predictably grim results for many once powerful players. Dealers chatter nervously amongst themselves as they set up for art fairs that seem ghostly in comparison to their recent heyday. Galleries that expanded rapidly are now contracting just as quickly. Some are closing, or will soon close. Auction houses slash their estimates, hoping to conceal the fact that in the last year prices have declined up to 50%, depending on the art in question.


Still, many soldier gamely on, looking for silver linings, or at least indulging in a bit of soul-satisfying Schadenfreude. Some speak longingly of a return to the days when artists were poor and art was pure. There is hope that the ongoing financial crisis, painful though it may be, will cleanse the art world of crass speculation and overhyped mediocre art, encouraging a more considered focus on quality and connoisseurship. Not long ago, dealers struggled to find inventory and worried that all the great art had been spoken for. The good news is that a lot of wonderful art is back on the market, and at rates affordable to collectors once priced out of contention. The claim that "now is a great time to buy" may sound self-serving, but it contains an element of truth.


It is too soon to know whether the socioeconomic changes wrought by this so-called Great Recession will be as far-reaching and sustained as those that resulted from the Great Depression. In the grander scheme of things, art is a very minor component of the global economy, but dependent on it nonetheless. The art market bubble was caused by the same factors that produced bubbles in other sectors of the economy. And the economic trends that reduced the relative real earnings of the middle and working classes over the past twenty-five years proved exceptionally hospitable to the growth of art consumption. Starting with Ronald Reagan, five Republican administrations and a scarcely distinguishable Clinton interregnum cut taxes for the rich and undermined many of the regulations that were put in place after 1929 to curb speculation and fraud. The resultant pooling of wealth at the top of the economic food chain created a boom market for luxury products of all kinds, including art.


Bubbles often stem from an initially valid economic premise. If mortgage rates are low, more money can be allocated to real estate purchase prices, which increase accordingly. Problems arise when people assume that what is in fact a temporary adjustment is a permanent trend. In a similar fashion, the three-decades-long art market boom began with the inflation of the 1970s. Art prices, always a lagging indicator, only caught up to other inflation-adjusted values in the early 1980s. This created the illusion that art prices were rising rapidly, which in turn fueled the speculative boom of the later 1980s. After the art market crashed in the early ‘90s (following busts in equities and real estate), observers concluded that collectors had been too undiscriminating in their purchases, causing values to increase regardless of quality. The next art market bubble would, accordingly, be different.


"Only buy the best" became the mantra for the art bubble that developed during the past decade. This was the perfect credo for the Wall Street bulls who locked horns in the auction sales rooms, competing to demonstrate their might by overpaying for one trendy object after another. Auctioneers and dealers eagerly wooed these super-wealthy buyers, playing them off against one another, focusing more and more exclusively on the type of material that would appeal to them. Dealers used the auction system to publicly establish preposterous prices, which were in turn eagerly hyped by the press. Art consultants, especially when working on commission, had little incentive to counsel caution. Although auctions are carefully engineered and easily manipulated, many considered sales results indicative of true fair market value. Despite the intense focus on "quality," however, it was not clear that the works with the premium prices really were all that much better than the works they eclipsed. The price differential between an A-plus and an A-minus work by the same artist could be extreme and arbitrary.


High prices at the top of the market concealed the fact that a lot of material was selling poorly. Even as prices for the work of some artists doubled, tripled and quadrupled, other segments of the market remained stagnant; adjusted for inflation, many prices actually dropped. By one standard calculus --"art sold by value"--the auction houses were doing fine. By the other standard--"art sold by lot"--they were doing less well, with 20% to 30% of the items in a given sale routinely going unsold. But auction houses are masters at spinning their sales results, and as long as sales totals met or exceeded presale estimates, everyone assumed the art market was great. Eventually, of course, this sort of pyramid--with the financial health of the market riding on just a few top-tier works--is doomed to collapse.


As in the wider economy, the bursting of the art market bubble has exposed a certain amount of fraud. Like people in other lines of work, auctioneers and art dealers sometimes make bad business decisions that, exacerbated by chronically low profit margins and weak capitalization, can spur criminal malfeasance. However, art is ill-suited to the sorts of large-scale Ponzi schemes concocted by people like Bernard Madoff. The intimacy of the relationships between art collectors and dealers tends to limit the scope of any potentially illegal activity. Art cannot easily be sliced and diced into derivatives. Attempts to establish art-based investment funds have been largely unsuccessful, for a number of reasons. It is difficult to “hedge” against a potential decline in value. And even if the art in question eventually appreciates, it is also difficult to distribute gains according to a predetermined schedule. Furthermore, there is no joy in fractional ownership of works one never gets to see; a primary dividend in collecting art is the pleasure of living with it. Art does not behave like other types of investments, because it resists objective evaluation and quantification.


One of the great truisms of collecting is that, while art can be a good investment, art bought solely for investment purposes seldom performs particularly well. The collections that appreciate most are those formed by passionate aficionados who take the time to really understand what they are doing and hold the work for relatively long periods. The current economic downturn actually provides good opportunities for such buyers. And whereas the auction arena was well-suited to the speculation and conspicuous displays of wealth that became rampant during the bubble, the present climate favors the more refined expertise of experienced dealers. Auction houses can still pull off grand celebrity events like February’s Yves Saint Laurent sale at Christie’s, but many collectors today feel more comfortable with smaller galleries. Reduced demand, rising buy-in rates and declining estimates make auction a risky proposition for sellers, whereas dealers can better calibrate prices to market conditions and have more time to intelligently place the art. Distress sales—there are and will be quite a few of these—can be handled more discreetly and in a more controlled manner by a dealer.


How much have prices come down? The value structure of 2005-06—at the time considered a strong market—provides a logical benchmark. Reverting to those prices would wipe out the gains produced by the bubble during the intervening period, without affecting the value of works by artists whose markets remained stable. In any market downturn, some sellers unrealistically stick to the high values of days gone by. As evidenced by the disappointing sales results at the May auctions in New York, this approach is doomed to failure. But recent experience also suggests that (perhaps owing to greater financial hardship) over-pricing is less prevalent now than it was in the early 1990s. Pricing flexibility on the part of sellers, dealers and auctioneers should ideally allow the market to recover more quickly than was the case during that last crash.


Without a doubt, there is a lot less liquidity in the art market, just as there is less liquidity in the world. Some people think that money is bad for art—that it hinders connoisseurship and the production of great art. But in fact, money is neutral—it can be used to ends either good or bad. The money that was sloshing round the art world over these past ten years made life easer for nonprofits, gallerists and young artists, at least some of whom were worthy of support. At the same time, there is no denying that an excess of money fostered superficiality. Lavish catalogues, exclusive parties and a host of other costly perks, rather than genuine connoisseurship, became the engines of economic growth at the auction houses, the big art fairs and, to a lesser degree, at private galleries. Collectors gravitated to “sound-bite” art—works that instantly telegraphed simplistic messages along with the owners’ net worth.


What type of art will we gravitate to now? Will some of the past decade’s art stars be jettisoned? Will we have time again, finally, for more contemplative art, art that stirs the soul and not just the wallet? Inasmuch as art is a reflection of society, the answers to those questions will depend on the sort of society we become. Across much of the country and in Washington, there is gathering support for new policies, like progressive taxation, re-regulation and executive pay caps, that would create a more level economic playing field. Such initiatives would stanch the upmarket flow of capital that fueled competitive art consumption over the past three decades, and presage the return of a smaller, more knowledgeable collector base similar to that which existed in the 1960s and ‘70s. At the same time, we now live in a true art world, which will never again be as provincial as it was forty or fifty years ago. Globalization appears irreversible, and the dealers who have fared best in the current crisis are those who successfully internationalized their clientele. As America’s global hegemony fades and New York becomes simply one among a number of cultural capitals, we can expect the nature of art to shift accordingly. Where that will lead, nobody knows.