Rise and Fall of Art Prices
Similar to the late 1980s, when the Japanese collectors took on the art world, 00s are also witnessing record art prices for the most popular artworks by the most famous artists.
What causes art prices to rise?
Increased Liquidity
Art prices often reflect the increase in the wealth of people, whether it was the Japanese in the 1980´s and the private-equity and hedge-fund managers, the Russians, the Indians and the Chinese, in the new century.
Popularity of a Certain Type of Art
Art prices of a certain type of art tend to rise depending upon its popularity. In the 1980s, we saw a phenomenal increase in the rise of the Post-Impressionists, in the 1990s of the furniture and design, and recently, of select names in contemporary art, particularly Indian and Chinese. Similarly, artwork prices for art that is out of fashion usually fall, such as the 19th century paintings, in the early 00s.
What causes the fall in art prices?
Various factors come into play to impact the fall in artwork prices, including:
Recession
Contrary to the popular belief, art is not recession-proof. In the 1990s, the collapse of the Tokyo property and stock market bubble led to a burst in the prices amongst the upper echelons of artworks.
Relatively speaking, artworks priced up to $ 100,000, are not a susceptible to a significant fall in prices due to a greater diversity amongst buyers.
Illiquidity
Considering that art is probably one of the most illiquid assets, it takes longer to swing back up. Comparatively speaking, stock prices can jump back up in months or at least in a couple of years, real estate may take a few more years, but art can take even longer. For example, Post-Impressionist prices have not yet seen the prices levels that they achieved in the 1980s.
Fall in Popularity
Even if the economy may be doing well enough, if a style of art or an artist no longer attracts "bragging rights", it is likely to fall straight out of the ball game. This can happen to English furniture and it can happen to a Warhol. What may be termed as the "Really Hot" artists are probably the most susceptible to this type of an impact.
Mitigating the Risks
Diversification
It goes without saying that not only should one's assets be diversified, but one should diversify within an asset class. If you are an art investor, it is recommended that your assets include different styles and mediums.
Buying at the Right Price
Like any asset class, avoid buying at the peak prices. You may not be lucky enough to get another collector to pay a higher price in five years´ time. If you are buying at an auction, you are buying a secondary market piece and paying for the financial returns of the auctioneer and the current owner. Similarly, artworks acquired at art fairs have imbedded components including the costs for participating in an art fair, costs for shipping from the artist studios to the gallery onwards to the art fair, storage of art works, return shipping for the unsold pieces, etc.
A way to avoid this may be to acquire through a gallery, which has lower operating costs and may be working with the artist or his/her estate, directly
Ensuring Liquidity
One of the biggest reasons why major banks shut down their art funds was the lack of liquidity in the art market. This factor is specially exacerbated when you are not a bank but a private collector who does not have a major billion dollar collection, which a resourceful auction house may be interested in.
Artworks that are prices at $100,000 or less may be an appropriate way to go, as there are more buyers for such pieces.