Bubble, Bubble

July 4th, 2008
More Questions About the Meaning of the London Sales

As promoters of the idea that the rapid rise of value in the art market over the 2006-2007 period was not a bubble, we find ourselves in the interesting position of wondering whether there isn’t a bubble forming now. (Our case after the jump.)

We write this because of a few quotes that appeared in the London wrap-ups like this one from Bloomberg.com’s Scott Reyburn:“There’s no confidence in stock markets at the moment,” said London dealer Alan Hobart, of Pyms Gallery. “People have realized there’s money to be made out of art.” Or this comment made by Tania Buckrell Pos, the art advisor who bought the $80 million Monet: `[T]here’s no doubt that people are now treating art as an alternative asset class,” she said.
A bubble–whether in credit, housing or tech stocks–forms when momentum de-couples prices entirely from fundamentals. In other words, prices don’t become a bubble just because they get ahead of the value of assets; prices turn into a bubble when they only reflect a relationship to other prices. The problem with looking for a bubble in art is that there is no valid, objective measure of underlying value. A work of art is only worth what someone else is willing to pay for it. And, remember, except in the situations where the legendary three Ds–Death, Debt and Divorce– of the auction trade apply, a work of art does not have to be sold if there is no market for it.
With that caveat in mind, there is some evidence that we can see a bubble forming for the very best works of art. Take this comment from Carol Vogel’s Inside Art column in the New York Times. “The difference between good and great is 1,000 percent,” said Tobias Meyer, worldwide head of Sotheby’s contemporary art department. “If a work is overhyped or not good enough, nobody is interested.” On the face of it, Meyer offers strong evidence that discerning collectors are safely chasing value.
Others have relentlessly put forth the idea that the middle market is crumbling. Look at any newspaper or wire service report of the London sales and you will find mention of arttactic’s Anders Petterson. Fortune magazine picks up the meme and runs with it:

According to research firm ArtTactic, works priced at more than $1 million made up about 70% of the contemporary art auction volume this year. Lower-priced pieces, which are offered by the auction houses at day sales rather than at the high-profile evening auctions, were more likely to sell below their top estimates or to fail to sell.
This softness shows that middle-market buyers are balking at rapidly escalating prices. For example, this week Christie’s featured six works by Damien Hirst at its day sale in London. Two didn’t sell, including a medicine cabinet that was estimated at $690,000 to $880,000. In its last auction four years ago, the Hirst piece fetched $212,000, nearly three times its top estimate.

But that report was clearly written before all of the Day Sale results were in. Bloomberg.com reports the action at Sotheby’s Contemporary art Day Sale, the last event of the London selling cycle.

“On July 3, Sotheby’s 329-lot day sale of contemporary art made 26.8 million pounds with fees against an estimate of 19.8 million pounds to 28 million pounds. Eighty-three percent of the lots found buyers.“[emphasis added]

Day sale sell-through rates are generally much lower. Hitting 83% in a day sale suggests a very strong middle market. Next week, Art Market Monitor will try to explore some of these questions with data but in the meantime, let’s get back to the central question of what consitutes an art bubble.
By definition, weakness in the middle market would suggest that there is no art bubble. Buyers are making judgments about the merit of the works on offer, not buying indiscriminately on momentum. Phillips de Pury, where many momentum artists get their auction start, had a rough sale this week and missed on out with artists like Steve Parrino and Rudolf Stingel.
Nonetheless, the flight to quality–and the nature of some of the bidding on the very best lots–suggests crowding at the very top end of the market. There have already been reports of new collectors purchasing their first works in the eight-figure range. The expanded corps of world-class advisors and the greater efficiency of the auction houses in translating buyer interests into seller intent has made it much easier for the average billionaire to start collecting at the very top.
So, if one is motivated to diversify assets, hedge inflation, join the big leagues of international collectors, all are now much easier to accomplish through private and public sales on the secondary market. All it takes is money. Perhaps this is what explains the results from the Impressionist and Modern sales. We can see that the 8 out of the top 10 Imp/Mod lots went for numbers greatly in excess of their high estimates. The top five Imp/Mod lots were all in excess of 150% of the high estimates. That’s a lot of demand pressure.
The very best lots happen to also be the most liquid as well. Going back to the beginning of this post, if you are parking money in an asset like art, you will want to choose the works with the most potential liquidity (getting your money out at a loss is better than getting no money at all.) The best lots also have the most potential to hold their value and act as a hedge against inflation.
The reason we’re looking for this bubble in the London sales is that Europeans are more likely to use art as a store of value. Bloomberg also quotes the Merrill Lynch report referenced in an earlier post, “Worldwide, High Net Worth Individuals spent 15.9 percent, the highest proportion, of their “Investment-of-Passion” dollars on fine art, said the report. The European wealthy are the most avid consumers, spending 22 percent of these dollars on art, it said.”
The sudden return of the Impressionist and Modern category to bullish vigor may be the first real–and demonstrable–sign that the top end of the art market is building into a bubble. Or not.