Is the art market experiencing a new boom, or is it all just another bubble destined to burst? With artists seemingly setting benchmarks at auction on a monthly basis and prices at fairs for pedestrian artworks pushing into the millions of dollars, there are fears in the art world of another crash. Privately, some people are talking about a steep market correction—as much as 60 to 80 percent in the contemporary art sector.
It is understandable why there is such skepticism about the current bull market for art and collectibles. Twice in the past decade we’ve seen the inflation of asset values in the art market followed by their inevitable, painful deflation. The parallels and analogies to today’s market situation are clear and worrying. But at the same time, there are significant differences that are worth taking a minute to review.
Many forces affecting today’s asset bubble reflect broad macroeconomic trends having little or nothing to do with the current art market or its past performance. Easy monetary policy in the United States, keeping bond yields low, has pushed a slice of the excess investment capital into so-called alternative asset classes in which investors see security and the possibility of long-term value. There has been a flight to objects.
Meanwhile, the Central Bank of Japan is more or less printing money and lending it at impossibly low rates, flooding the global financial markets with excess liquidity and further bloating asset prices. Japanese money flowing into China has helped create a real estate bubble in that country. Chinese central bankers over the summer, in a wise step, moved to stop or at least restrict these capital inflows.
The art market itself has changed in several important ways. The role of the collector is changing as a greater number buy and sell work—both privately and at auction—with increasing frequency. This means a lot of art is coming onto the market more often and at steeper prices. More and more it seems that art buyers today are interested in speculation for its own sake. There is no such thing as buy and hold anymore.
There has also been a transformation at the top end of the dealer system. Ten years ago big art dealers made a lot of their money in the secondary market, buying inventory and then reselling it. Today these same dealers are cashing in on the primary market—as secondary market prices for new works by contemporary artists skyrocket, they can charge almost any price for works by artists in demand: It is as if they are floating these artists like junk bonds.
More money is flowing into the art world from newly minted millionaires in developing economies. Meanwhile, offshore bank accounts are quietly being cleaned out as tax authorities in the United States and elsewhere tighten loopholes, adding to the liquidity bubble. This trend is likely to be reversed in part with rising interest rates, but with so much cash sloshing around and nowhere to put it, art prices will continue to rise.