Enrique Liberman: beware of bubbles

For picture credit see end of article

What is driving the current boom in the art world, and is it a bubble soon to burst? According to Enrique Liberman, president of the Art Fund Association and chair of the Art Law + Art Funds practice group at Bowles Liberman & Newman LLP, there are several key questions that can be asked when striving to understand the phenomenon and to understand where – and when – it is safe to invest.

One prominent issue is the prices being fetched by Contemporary artwork in the current environment.

“Sometimes you’ll go to an auction and you’ll see a masterpiece by Velasquez that can’t find a bidder at $2m, and then you’ll go to a contemporary art auction and a piece by an artist who’s still alive whose work is really not that important in terms of the narrative of art history will fetch $5m or $6m – and nobody even blinks an eye. You have to wonder whether there might be a bubble in some art markets (i.e. contemporary art) and not in others (i.e. Old Masters and Impressionist paintings),” he says.

Another question is whether or not the bubble is due to factors that are unique to the current economic situation, or whether they reflect a fundamental change in the art market.

“With interest rates so low, it may be that the art market has picked up because there are no other places to put your money at present: you’re not going to put it in bonds offering little to no real return, so riskier, luxury assets may start to look attractive. The question is, when interest rates finally go back up, and you can maybe get 5% or 6% in triple AAA-rated corporate bonds, will the investors who turned to luxury assets get out of those, bringing the art market down?”

Liberman also speculates that the current booming art market may be fuelled by investors whose stock market portfolios have gone up so much they feel irrational exuberance and are buying a lot of assets based on the feeling that they have become wealthier – in which case, the art market may be vulnerable if there is a correction that affects these individuals’ portfolios.

A further possible and more likely explanation is that globalisation of the art market over the last decade has increased the number of collectors, bringing in eager new players who are driving up prices in their anxiety to acquire iconic pieces of art.

“There has been a shift in wealth from the West to the East – and wealthy individuals in the East want to acquire the trappings of wealth; the premier, trophy pieces. To do that you have to pay a premium because someone who has a Warhol will very rarely be financially distressed enough to sell it at a bargain price. If you want it, you’ll have to over pay for it – and that causes the market to go up.”

It has been suggested that every new billionaire who decides to start investing in fine art has the potential to really drive the market up, because even if they do not win a piece, the very presence of someone new bidding in the auction room is enough to cause prices to rise.

Ultimately, it remains to be seen whether the current boom is a result of a temporary economic situation or a fundamental shift in the market. It could be due to the world becoming ever more polarised between uber-rich and poor: as the rich get richer, they have more money to spend on luxury items. Or it could be that when the economy changes, they will take their money elsewhere. Only time will tell.

Picture credit: Bubble with a Tree Inside by Ali T on Creative Commons license.