Is the art market in a bubble, and when will it burst?

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'Bubbles' by Justin Jensen. Image courtesy of Creative Commons license

Economist Nouriel Roubini recently created a buzz with his comments that investors should treat art as an asset class – but that they should be mindful of the possibility that a bubble is forming. In an article published on his website, he said that while many believe the current boom in the art market is different, and sustainable, it is worth remembering there have been booms and busts in the art world in the past.

For instance, in the late 1980s, there was a group of artists who fell out of fashion and ultimately disappeared. He warned that in art, as in all things, people are slave to fads and will always be chasing ‘the new shiny thing’ while casting aside the toys that no longer interest them.

Jacob Pabst, CEO of art services company artnet, agrees to some extent: he points out that all markets go through cycles, and while it is impossible to predict the timing of the next correction, it is reasonable to expect that the art market will one day experience one again. However, he adds that he expects the market to continue apace for the time being.

“The economic horizon remains positive in the United States in particular, so it does not feel as if such a correction is imminent,” he says.

Another factor to consider is the global increase in super-rich individuals whose appetite for art helps to keep the market healthy. Victor Wiener, who runs firm of art consultants and appraisers, Victor Wiener Associates , believes the influx of buyers from Asia and Eastern Europe has helped the art market stay buoyant even in the midst of the most recent global financial crisis.

“The impact of the recession on the art market was much greater in the 1990s than it was in 2008,” he says. “Even though the world crisis of 2008 was much greater than the world crisis of the 1990s, the fact that there are more buyers, emerging buyers and so on has cushioned the blow.”

Because of this, he does not believe the market is in danger of sudden decline.

“When you have a fine quality of art and a seemingly infinite quantity of prospective purchasers then prices are going to go up because there are more people vying for the same art.”

By the same token, however, chairman of LDJ Capital David Drake, a keen art collector, believes that the word ‘bubble’ can be applied to the current state of the market. He says that this is being fuelled by the emergence of wealthy buyers globally, plus investments by museums and other institutions keen to build their collections.

“Prices have grown fast. Six years ago I never thought it would happen so quickly but currently there are a lot of wealthy people in the world and the art market is booming,” he says. “I believe there will be a correction in the art market soon after the next correction in the stock market – but until the stock markets correct, the art market will not correct.”

Anders Petterson, founder of ArtTactic, disagrees, saying the whole market is not in a bubble – although there are areas that have become inflated.

“I think there is a generally a feeling that the market will continue where 2014 left off,” he says.

“We’re not talking about a global bubble but about individual segments of the market that might be more bubble-like. The prices paid for works by some artists have escalated very quickly, in a very short space of time, and I think everyone will question whether that is sustainable. It’s likely that there will be relatively isolated incidences where an artist maybe falls out of fashion and their  prices drop or the market will evaporate, but I don’t expect to see a major collapse in the markets as a result of an over-speculation.”

While he does see speculation is an issue, he does not see it as the biggest threat in the market at present.

“Gradual changes in taste could have a major impact on segments of the art market, i.e will the next generation of collectors collect what their parent’s generation has been buying?  If not, this could have a major impact on the many of the artist markets we see today. However this could take decades”

He adds that when defining a ‘bubble’ it is important to look at the market from the point of view of the high net worth individuals actually driving the market’s growth.

“Ultimately we need to establish what is and what should be defined as fair value. As long as people have and are willing to spend multimillions, for them that might be considered a fair value for the work. Yet to most people they may seem to be paying extraordinarily high prices not really founded in any reality.

“The idea that the market is in a bubble can come from people with that perspective, but actually people who are really involved in the market don’t see it that way. That’s why I think it probably will continue in a similar vein to last year – but with mini bubbles and regional bubbles.”

He echoes Nouriel’s view that art is an asset class, saying that the more people are looking at art as a potential investment, the more characteristics of the financial market the art market will take on. With this will come more volatility, more ups and downs and more markets that might have bubble-like features.

“However, I don’t see a global phenomenon that would suggest all markets around the world are suddenly going to lose their value – I think it might be regional and geographical but not a global thing. For example, we have seen in the Chinese market undertake an extraordinary rise up to 2012 and then the market has dropped back since then”

Whether Nouriel’s warning proves to be timely remains to be seen, but there is no doubting that the global appetite for art remains high, and that many will continue to invest with confidence in 2015.