Investing in art


Jun 1st 2006
From The Economist print edition

Art, as yet, appears unaffected by the wobbles in other assets

EVER since the 1870s, when a group of French landscape painters produced work deemed unacceptable for the Paris Salon but went on to sell rather well, malnourished artists have comforted themselves with the thought that the market would one day put a proper value on their work. For many (mostly long-dead) artists, this finally appears to be happening. Investors in financial assets may have had a jumpy few weeks, but salesrooms have notched up record prices in May.



Wanted: dead or alive


Emerging markets are doing particularly well: Sotheby's recently held a sale of Latin American art that fetched a record $22m, including $5.6m for Raices (Roots) by Frida Kahlo (pictured above). Even living artists are selling for unprecedented sums. Collectors bought $432m of contemporary art at Christie's, Phillips de Pury and Sotheby's, almost as much as they spent a week earlier on Impressionists and Modern art.

All this has helped art outperform equities in recent years, at least on some price-performance measures. According to an index compiled by Jianping Mei and Michael Moses of New York University, fine art has outperformed the S&P 500 in each of the past five years. This is historically odd. Other measures show that prices of art did far worse than equities over the past 25 years and slightly worse during the past half-century. What has happened recently to make canvas preferable to paper?

Three things, according to James Goodwin, author of a forthcoming book on art markets. First, rich people have got much richer. At last count, 8.3m people across the world had more than $1m in financial wealth, according to a report by Capgemini and Merrill Lynch, up 7.3% on the previous year. These ever-wealthier folk bid up the prices of positional goods—those in short supply that become highly sought after. This may explain why, for example, Willem de Kooning's painting “Untitled XVI” recently sold for $15.7m—double its estimate—at Sotheby's in New York. “If you're bidding against a Bill Gates or a Steve Jobs,” says David Barrie of the Art Fund, a British charity, to illustrate the point, “you're going to lose.”

Second, buyers are spread across the world, which makes for a global market. Also, they often buy patriotically, which is one reason why Russian art has done well of late, and why dealers are excited about the potential for price rises in the artworks of emerging markets, such as India and China.

Third, art is a lagging indicator. It is hard to value, and buying and selling incurs high transaction costs. Thus liquidity in the market is low: buyers have held on to work for 30 years on average over the past 125 years. But art is less removed from the fates of other assets than it might look. It seems to do well during periods of above-trend growth and inflation. In a steady economy, it rises and falls slowly. Every so often, it suffers a spectacular crash. Not that the painters lying in Paris's cemeteries mind very much now.

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