The art market

Top drawer

Dec 16th 2004
From The Economist print edition

A stunning price—and this time, for something old

IT IS said that people buy contemporary art when they are confident about the future and old art when they are not. Maybe a few worries are setting in. On December 9th, a piece of furniture known as the Badminton Cabinet—made, in pietra dura, ebony and ormolu, in 1720-32 by the Medici workshops for the third Duke of Beaufort—was sold at Christie's in London for £19m ($36.7m), a record for a non-pictorial work. The auctioneers had hoped to match the £8.6m paid by the previous owner in 1990.

The cabinet is the latest of a number of older works going for record prices. However, in recent years, contemporary art has made all the running. Last month saw record auction sales of contemporary art in New York. Research by the Art Sales Index shows that over the past four years the shares of contemporary and modern art in auction-market turnover have risen, while those of Old Masters and 19th-century works have declined. That said, Daniele Liberanome of Gabrius, a company that tracks art prices, considers Old Masters undervalued based on their performance since 1990.

Conventional wisdom has it that older art holds its value, while contemporary stuff is for risk-lovers. William Goetzmann, a professor at Yale, estimates that during the last art-market slump, which set in after 1990, Impressionist and contemporary works fell by most (51% and 40% respectively), while Old Masters suffered least (down by 16%). Yet despite the bumps, contemporary works have been rewarding for those who are prepared to hang on: according to Jianping Mei and Michael Moses, professors at New York University, since 1970 the returns on contemporary art have far outstripped those on Old Masters and 19th-century paintings.

Since the late 1980s, more sophisticated analysis of the art market and a growing interest in alternative investments have spurred the creation of several new investment funds focused on art. At a recent conference organised by one of these, the Fine Art Fund, Rachel Campbell of Maastricht University pointed out the low correlation between returns on art and on those other investments. Given that it usually pays to diversify, that is a good argument for investing in art, whatever your taste. The Fine Art Fund, which began buying this April (and has 36% of its money in cash), advises that investors spread their art allocation fairly evenly between Impressionists, Old Masters, modern art and contemporary works.

Contemporary art, in particular, has served rich investors well in the past few years. Prices stayed buoyant when stockmarkets slumped. Nevertheless, one recent academic study has found a correlation with another asset class: during the last world art boom, in the late 1980s, prices were closely tied to property values, specifically Japanese land prices. After 1990, art and property slumped together. Now property prices in several countries are once again at giddy heights.

Investing in art will always be a risky business. Works of art are by definition heterogeneous; holding periods vary; the market is illiquid; art yields no income, producing only capital gain or loss; transaction costs are high. As for contemporary art in particular, it is a sobering thought that, according to Mr Moses, each year an average of only two artists emerge whose work increases in value over time. All this speaks against a big commitment to speculating in art; better, maybe, simply to buy what you like, if you can: treat your money, in other words, not as invested but as consumed.