The High - End Art Market - A Second Tulip Mania

A Second Tulip Mania

The prices of contemporary art works have risen to astonishing levels in recent years. Insiders say it’s because we have been living through a golden age of art. Nonsense, argue Ben Lewis and Jonathan Ford, it is a classic investment bubble
Ben Lewis - Jonathan Ford
(Source Forbes.com, Prospect Magazine)
The bubble in contemporary art is about to pop. It has exhibited all the classic features of the South Sea bubble of 1720 or the tulip madness of the 1630s. It has been the bubble of bubbles—balancing precariously on top of other now-burst bubbles in credit, housing and commodities—and inflating more dramatically than all of them. While British house prices took six years to double at the start of this century, contemporary art managed it in just one, 2006-07. (Over the same period, old masters went up by just 7.6 per cent and British 17th to 19th century watercolours actually lost value.) Contemporary art in the emerging economies did even better. The value of its sales in China increased by 983 per cent in one year (2005-06). In Russia they rose 2,365 per cent in five years (2000-05), while its stock market increased by "only" about 300 per cent.

Even these numbers understate the incredible tulip-like increases in the value of the hottest artists. The Chinese painter Zhang Xiaogang saw his work appreciate 6,000 times, from $1,000 to $6m (1999-2008); work by the American artist Richard Prince went up 60 to 80 times (2003-2008). The German painter Anselm Reyle was unknown in 2003; you could have picked up one of his stripe paintings for €14,000. Now he has a studio with 60 assistants turning them out for about €200,000 each. Any figures for the whole contemporary art market are guesswork, though Christie's chief executive, Ed Dolman, recently estimated that it had grown in value from $4bn a year to somewhere between $20-30bn in the past eight years.

But this bubble is now deflating. Sotheby's share price has lost three quarters of its value over the past year, sinking from its peak of $57 in October 2007 to $9 in early November—close to its 1980s low of $8. The latest round of contemporary art auctions in London has gone badly. In October, the Phillips de Pury sale made only £5m—a quarter of the minimum estimate; at Christie's almost half the lots didn't sell; and an air of denial hung over the Frieze art fair like a fog. Upmarket dealers Matthew Marks and Iwan Wirth claimed to have clinched many big deals, but the reality was surely different. A leading New York gallerist was said to have sold very little and a well-known German dealer not a single work.

Some dealers have blamed the poor quality of the works in the London sales. "Just wait for New York in mid-November," one said, "and you'll see the art market is still doing well." But New York has been no better. This should have come as no real surprise. If you consider the market as a purely financial enterprise, rather than one in which aesthetic quality has any bearing, then the boom in contemporary art has the hallmarks of a classic investment bubble.

In his book, Manias, Panics, and Crashes, Charles Kindleberger observed that manias typically start with a "displacement" that excites speculative interest. It may come from a new object of investment or from the increased profitability of existing investments. It is followed by positive feedback as rising prices encourage less experienced investors to enter the market. Then, as the mania gets a grip, speculation becomes more diffuse and spreads to other types of asset. Fresh assets are created at an ever faster rate to take advantage of the euphoria and investors try to increase their gains by borrowing to buy assets or using derivatives. Credit ultimately becomes overextended, swindling and fraud proliferate, and the mania ends in panic as investors seek to liquidate their positions.

The art market has adhered spookily to Kindleberger's model. By 2004 it was clear that a boom in contemporary art was well underway ("The price of art," Ben Lewis, Prospect, October 2004.) At the Armory show, New York's trendsetting contemporary art fair, dealers sold $43m worth of art in four days, nearly twice as much as the previous year. There were huge price rises at auction, too. A 1996 sculpture of a stuffed horse hanging from a ceiling, Ballad of Trotsky, by the fashionable and witty Italian artist Maurizio Cattelan, sold for $2m at auction in May 2002. It had increased in value tenfold in two years. Gerhard Richter's paintings quadrupled in value between 2000 and 2004. Even then, buyers were paying $1m to $3m for a work by Hirst, Warhol, Basquiat or Koons. Those sums now seem quaint—last year a Koons went for $23m, a Hirst for $20m and a Basquiat for $15m.