Bubble, Bubble: Toil and Trouble in the Art Market

By Jane Kallir [published in Art & Antiques, Spring 2008]

Talk of an art-market bubble is almost as old as the recent run-up in art prices, which began three to four years ago. For many armchair critics, the art world has become a segment of the larger glamour industry, a place where celebrity and wealth mingle and merge. In our new gilded age, the public expenditure of large sums of money at auction is a glitzy spectator sport, yet a lingering spirit of egalitarianism makes us simultaneously long to see the rich and famous struck down for their excesses. So, it seems, some observers are eagerly waiting for the bubble to burst.


Defenders of the current art boom, on the other hand, contend that there is no bubble. Today’s art market, they say, is fundamentally different from all prior markets, because the huge concentrations of wealth that have been amassed throughout the global economy are essentially invulnerable to localized financial shocks. The global rich are unphased by the economic blips—rising gas prices, downsizing, off-shoring, mortgage foreclosures—that affect the rest of us. These are the people who have (so far) kept the Manhattan real estate market perking along, even as housing prices across the U.S. falter and fall. Many art-world cognoscenti remain confident that the elite’s appetite for art can only grow, pushing prices ever upward as the supply of trophy-quality objects is depleted.


It may well be that both the art-market bulls and the bears are right. There have been fundamental shifts in the distribution of wealth over the past two decades, and this situation is not likely to change soon. But the competition to serve the super-wealthy has created a dichotomy of art-world haves and have-nots nearly as stark as that which exists on the larger economic scene. In the art-world game of musical chairs, there are fewer seats for fewer players, and many may find themselves out in the cold if the music stops.


Systemic flaws in the current art market belie its apparent growth. Despite the media attention focused on seven- eight- and even nine-figure prices, the market for these trophy artworks is inherently limited. Dealers and auctioneers who want to be seen as major players must both obtain such inventory and then sell it. At the upper reaches of the market, however, even a slight miscalculation can be disastrous. A dealer has perhaps half-a-dozen chances to sell a high-ticket work before it becomes stale and over-exposed. He or she can show it at the fairs in Basel, Miami, London and perhaps a few other places. For an auction house, the sales opportunities are even more narrowly limited by that split-second when the auctioneer’s gavel comes down. If the handful of collectors who have the potential interest as well as the financial ability to buy the work in question decide to pass, the game is effectively over. Time may make it possible to sell the piece, probably at a reduced price. But meanwhile, everyone—auctioneers, dealers and clients alike—will want to move on to something else. Anyone who has a financial stake in the artwork, be it the original owner, the auction house, the dealer or the dealer’s backers, will be stuck holding the bag.


Today’s overheated art market has raised the stakes for all art-world players. In October, the shuttering of the once well-respected Salander-O’Reilly Gallery amidst a hail of lawsuits left many people clucking their tongues about irresponsible dealers, but auction houses are equally vulnerable. Yes, the big houses have deeper pockets than any one dealer, but they also have higher overhead and take greater risks. As elsewhere in the art world, a growing percentage of the auction houses’ profits derive from an increasingly small number of high-end sales. The bulk of their marketing efforts go into promoting multi-million-dollar consignments, often leaving sellers of lower-priced works underserved and disgruntled. In almost every segment of the art world, the middle market is languishing. The dynamic of the salesroom requires multiple bidders, and collectors, often encouraged by auction-house personnel, tend to cluster around the flashiest lots in a given sale. Consequently, minute differences in quality can have an inordinate influence on pricing. In some cases, due to arbitrary marketing decisions, ignorance and luck, inferior works win out over better ones, the latter commanding far less than they should or failing to sell altogether.


With more than ever riding on the top end of the market, auction houses compete vigorously for those choice consignments. They drop the seller’s commission altogether, kick back a portion of the buyer’s premium to the consignor and, most notoriously, offer guarantees. [In exchange for a higher commission, the auction house guarantees to buy the work for an agreed-upon price if it does not sell.] The art world momentarily held its breath after the Impressionist and Modern auctions in New York this past November, when five guaranteed lots (including two bearing estimates in the eight figures) failed to find buyers at Sotheby’s evening sale. The day after the auction, Sotheby’s stock plunged 28%, and some thought the art-market bubble had finally burst. Optimists, on the other hand, cited the strong results at Christie’s just two days earlier, and they were, at least for the time being, proven right when the contemporary auctions the following week pulled in over half-a-billion dollars.


In periods of rapidly rising prices such as the present, speculators sometimes make quick profits, and over time, astute collectors may reap significant financial gains. But art cannot be quantified or analyzed like other types of investments, and it should not be treated as such. Auction sales results are not like the Dow Jones industrial average. A lot of what goes on in the salesroom is theater: auctioneers egging on a lone bidder until the reserve [the seller’s undisclosed minimum price] is met; dealers paying huge prices for pieces by artists in whom they have a vested interest; art consultants who, working on commission, have every incentive to advise their clients to overspend. While one share of Google stock is the same as another, no two Picassos are alike. The tricky business of judging comparables is made all the more treacherous by today’s weak middle market and the pronounced devaluation that occurs when works fail to sell quickly. Ostensibly scientific statistical surveys, such as the Mei/Moses index, that try to measure appreciation by charting auction results ignore the fact that only art with some resale value ever gets to auction. Especially in the contemporary arena, a great deal of art is not so easily resold. “Flipping” work quickly for a profit is even more difficult than holding out for long-term gains, especially when one factors in transaction costs such as commissions, storage, shipping and insurance.


We are so addicted to growth as a measure of economic success that we have been inclined to see ever-upward spiraling art prices as signs of a healthy market. In fact, these price increases—selective and erratic—are indications of an unstable market. A number of collectors, dealers and artists have benefited handsomely, but many have not. Thwarted investment hopes coupled with a string of auction and/or gallery failures may well lead to an overall loss of confidence in the art market. If that happens, the bubble will burst, just as the doomsayers have predicted. On the other hand, a gradual leveling-off of art prices could be beneficial, allowing a more cogent relationship to develop between value and quality. A logical continuum between the low and high ends of the market, and a solid middle market would not only establish a more viable price structure but also allow more collectors to participate on every level. Whichever scenario takes place, anything that serves to undercut the present obsession with glamour, transitory fashion and speculation will, over the long term, be good for the market and, more to the point, good for art.