Evaluating the Current Art Market – Part 1 of 5

Evaluating the art market

The presumed art market bubble has been a hot topic for the past year. So, it was fitting that Borro CEO & Founder, Paul Aitken, at the 10th Annual Blouin Creative Leadership Summit, participated in a panel titled, “Has the Art Market Entered a Bubble?” Paul was joined by Patrick Meade, co-CEO of Bonham’s and Peter Loughrey of LA Modern Auctions. The panel was moderated by Dr. Roman Kräussl (Finance Professor at the University of Luxembourg).

Appreciating Assets was intrigued by this subject and will dive into the research behind the art market mania in a five-part series.

Art Market Bubble

The first step to tackling the question, “Has the Art Market Entered a Bubble?” is to define a “bubble.” In the financial context, bubbles occur when the prices for an asset class are highly inflated, bearing little relation to the intrinsic value of the asset. Bubbles have five stages:

1. Displacement – infatuation with a new paradigm (new technology; low interest rates; art as investment, etc.)
2. Boom – prices rise slowly and gain momentum over time as new participants enter the market
3. Euphoria – caution is thrown to the wind, valuation metrics are ignored
4. Profit Taking – smart money sells out, takes profits
5. Panic – liquidations, margin calls… supply quickly overwhelms demand and prices drop sharply

All signs point to the art market being in the first or second stage of a bubble. But, it’s important to ask, “Is it art, or is it everything?” Here are examples of potential bubbles in other markets:

The Unicorn List: the 130+ private tech companies worth over $1Bn, 11 of which are worth greater than $10bn (Uber, Airbnb, Palantir, Snapchat, SpaceX, Pinterest, Dropbox, etc.)

• Student loans and college tuition (Source)

Tuition Fees Increase in the US

• Equity markets in general (Source)

Equity Market Graphs

• Chinese equities collapsing since June, erasing all 2015 gains (-42%) (Source) NYSEARCA: REZ – iShares FTSE NA REIT Resi Index Fnd ETF

Chinese Equity downturn

• Housing prices ( North American residential real estate) (Source)

North American House Price Boom

Though these markets are in synch, we can’t truly identify them as bubbles. A market must go through each of the five stages outlined before it can be officially deemed as such. While this exercise did not allow us to answer the question posed, it does help us prepare for what could be next for the art market.

Now that we have identified what a bubble is, our next step is to take a closer look at the segments of the art market to see if they are behaving similarly. In the second part of this series, we will delve into the differences between the contemporary category and “blue-chip” artists.

About the Author:

Joe wrote about luxury asset trends for Borro Private Finance.