Articles

Tip of the Iceberg: The Vast Underbelly of the Art Market

by Mostafa Heddaya on August 18, 2014

(Hrag Vartanian/Hyperallergic)

(Hrag Vartanian/Hyperallergic)

“It’s really business as usual,” announced one Fabian Bocart in today’s New York Times, apropos the putative stability of the art market. He was speaking to the paper about flipper mythology, arguing that far from being subject to the whims of a dauphin caste of speculators, the market for art is exhibiting a healthy historical cyclicality. The article in question, authored by Lorne Manly and Robin Pogrebin, seeks to debunk the oft-repeated claim that “soaring prices and quick resales, especially of work by emerging artists, have fueled a perception that a new breed of collectors, fond of flipping art as they would a stock, have overtaken the market.”

Enter Bocart, a former interest rate derivatives trader and founder of Tutela Capital S.A., a Brussels-based art market advisory firm, and Beautiful Asset Advisors, a similar company in New York best known for its Mei Moses art indices. These two entities were, improbably enough, retained by the New York Times to assess the presence of flippers on the market. Never mind that the Business section of any respectable newspaper would probably blanch at the idea of asking an investment firm to conduct a reportorial project on the market in which they operate (even with the basic outside non-specialist methodology-checking the Times carries out here). The result, of course, is that Tutela and Beautiful find that:

Art has turned over more quickly in recent years … But the trend is not unprecedented — contemporary and postwar artwork that was resold in 2013 was owned for an average of 3.1 years, compared with 3.6 years in 1995.

This “postwar and contemporary” category is of course distinct from the emerging art identified by the Times as allegedly favored by speculators, but fair enough. Of the next two pieces of evidence they marshall, only one directly responds to the trend in question:

[T]he data indicate that contemporary works appearing at auction within three years of their creation are not coming to auction faster than in the past, and that such flipping remains very much the exception, not the rule. Though more works come up for sale each year, the percentage of these works was essentially the same last year, less than 2 percent, as in 2007, Tutela Capital found.

Beautiful Asset did another review of the art market, using a different measure, and reached a similar conclusion: While, historically, the percentage of works resold within five years is higher now than it was, say, two decades ago, that percentage has been decreasing since 2008.

So a relatively small percentage of the overall auction market is comprised of emerging works, and the size of the slice has remained more or less stable since 2007.

But all the major reports on this speculative market have explicitly noted that auctions are being dwarfed by undocumented private transactions, the volume, value, and frequency of which seem to greatly exceed the auction market:

  • “As traders seek to lock up profits, a picture can change hands five or six times within a year, Simchowitz said.” (Bloomberg, 2/6/2014)
  • “It’s impossible to know how big the private art market is,” says Arne Glimcher, chairman of PaceWildenstein in New York, one of the world’s largest galleries, with a staff of about 180. “I would estimate that it’s two to three times the auction market.” (ARTnews, 5/1/2008)
  • “Phillips de Pury chairman Simon de Pury, who has worked as a private dealer and continues to handle private as well as auction sales, says that ‘it’s very difficult to extrapolate overall sales, but I would expect the private market to be at least four if not five times as large’ as auction sales.” (ARTnews, 5/1/2008)

What’s more, the auction market has been widely acknowledged to be a lagging indicator of trends in the murky and massive private market. In other words, the driving forces of the public art market that Bocart heroically defends are completely opaque and rife with elements of speculation; the public results are determined by a non-public process where insider information, tax avoidance, and “front running” are reportedly the norm:

  •  A 2013 article in the Economist, not much noticed in the art press (though Christie’s recently began to offer its private services in one such facility in Singapore), notes that the world’s freeports — tax shelters for fine art and other luxury commodities — are bursting at the seams, and host a thriving tax-sheltered barter economy: “The wealthy are increasingly using freeports as a place where they can rub shoulders and trade fine objects with each other. It is not uncommon for a painting to be swapped for, say, a sculpture and some cases of wine, with all the goods remaining in the freeport after the deal and merely being shifted between the storage rooms of the buyer’s and seller’s handling agents.” (The Economist, 11/23/13)
  • As early as 2007, David Zwirner openly identified the seemingly unassailable dark pool that is the private market: “‘There were several artists whose work came up for auction this time [November 2007], like Prince, like [Rudolph] Stingel, where people involved in this market knew that the next sale would bring a record,’ says David Zwirner, a prominent New York dealer and gallerist. ‘The private market is slightly ahead of the curve; the auction is the confirmation.’ Even if the next round of auctions — scheduled for early 2008 in London — are hurt by the woes of the financial markets, that might not be catastrophic. ‘A wobble in the auction market would cause some soul-searching, but in contrast to the 1980s, the private market is enormously broad,’ Zwirner says ‘You’d have some soul-searching, but there would still be lots of activity and excitement in the private market … ” (Barron’s, 12/3/2007)
  • A clarifying note on the nature of the art market as distinct from the impression of it an art investment firm might have an interest in promoting (firms like the two that the Times gave credence to in the form of a largely unfettered platform for spuriously deflating the “bubble” question): Here’s how it’s described in a chapter on the subject from a major textbook, Asset Allocation and International Investments (Palgrave Macmillan, 2007): “We focus on a particularly interesting case: the art market. This market is highly media- and taste-driven, is illiquid and lacks transparency … 

One could go on. How curious it is, then, that the Times would close this triumph of against-the-grain reporting by noting that flippers might be discouraged by auction fees, clunkily comparing the effect to a residential mortgage refinancing. As would otherwise seem abundantly clear, flippers have every incentive to operate stealthily, outside of the auction system, chasing an edge on the market and capitalizing on it before it’s out in the open. Quantifying the size of this speculative section of the market, which surfaces rarely (perhaps more rarely than some have previously thought) at public auction, is a worthwhile task, but one that is clearly not as easy as the Times makes it seem.

The growth in the observable art market over the last decade has been significant, and notable for how the gains in value far outpaced the gains in volume: from 2003 to 2013, the overall art market grew by 154.5% in value, and 43.7% in volume, according to The European Fine Art Fair (TEFAF) 2014 annual art market report, which due to the conditions enumerated above almost certainly undercounts the size of the market. In the report’s appendix, we learn that millions of public auction results and thousands of gallery surveys were considered, but fewer than 40 collectors, which TEFAF drily concedes is “small … relative to the potential number of collectors worldwide.”

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