The curious consequences of an art market downdraft

Your art collection is probably worth less than half what it was worth a month ago. This may not last, but it implies several unexpected consequences in the short term.

As art market activity mostly evaporates in the wake of the coronavirus pandemic—as most art fairs and auctions are cancelled en masse— it is of course difficult to discern the true effects on prices in the short term. However, we can still glean several instructive pieces of economic information since Bonhams has made the macabre decision (now suspended) to continue holding auctions, even in the face of criticism by Artnews and other venues. 

This curious obstinance can nevertheless give us a small window into the effect on art prices in the short term.

For example, we can take some of the temperature of the post-war and contemporary art market through repeat sales of the same edition (as we have argued elsewhere, repeat sales of the same work can in fact be compromised by sample selection bias, but that may not be true for limited editions). 

In that regard, we find serendipitously that one example of Keith Haring’s Dog, an enamel and silkscreen on panel issued in an edition of 10, was sold at an evening auction at Phillips in London on January 23, 2020 for ￡591,000 ($775,690) with fees, just as the clouds were beginning to form. 

As it happens, another example of the same edition was offered just last week at Bonhams in London (March 12, 2020) and sold for ￡375,062 ($435,667) with fees, or 44% lower than the equivalent sale price some six weeks prior.

While I should caution that one edition by Haring is hardly a proxy for the art market as a whole, and the repeat sale of two examples of an edition in so short a time would likely dampen the demand for the second example in any market scenario, this precipitous drop could be taken as at least one measure of the larger effect of the pandemic on prices in the short term, in the absence of more reliable economic information.

More ominously, the two works by Pierre Soulages that were heavily promoted by Bonhams, and the only two in the sale estimated north of ￡1 million, both failed to sell. 

One of them, from the pivotal year of 1959 and related to a major work in the Art Institute of Chicago, was touted as among the top 10-15 works by Soulages to appear at auction during his long career, and so the failure to even reach the reserve price on an estimate of ￡5,500,000 - 7,500,000 ($6,500,000 - 8,800,000) is a worrying sign.

In fact, another example by Soulages from the same year (1959) with the use of red pigment that Bonhams touted as so unusual, was sold at Christie’s New York in November 15, 2018 for $10,600,000, or uncannily, again, 44% above the low estimate of the Soulages that failed to sell at Bonhams this week.

A trend?

Hard to say, but there are several interesting consequences of such an apparent major downdraft in prices. In terms of insurance coverage, it suggests that almost every art insurance rider is now woefully out-of-balance, at least in the short term, and clients are paying premiums well in excess of their insured value in the case of a loss or damage.

In one respect, this scenario to some extent mirrors the inverted yield curve we have witnessed recently in bond prices, which many economists have flagged as a possible harbinger of a coming recession. Briefly, an inverted yield curve emerges when short-term bonds have higher yields than long-term bonds, which normally have higher yields.

In the case of art market prices, we may now find that traditional metrics for establishing fair market value may now exceed the demonstrable measure of replacement (insurance) value. In most cases, replacement value is pegged at a significant premium to fair market value, which is often established by historic results at auction (typically, hammer price plus buyer’s premium). 

However, when you do not have current prices to re-establish fair market value in the current scenario—which necessitates a willing seller and a willing buyer, where the latter are nowhere to be found—then the true replacement value may be pegged below that last historic indicator of fair market value, at least in nominal terms. For example, if an artwork has a historic fair market value of $100,000 based on past auction prices, it may now have a retail replacement value of only $80,000 in the case of a short term loss, and this short term inversion of fair market and replacement values is similar to the inversion of the yield curve for government bonds.

Secondly, the explosion in art loans by private banks and other vendors in recent years have often been predicated on fair market valuations that limit the loan to no more than 50% of the aggregate value of the proposed collateral, to reduce the risk of the loan instrument. Given the apparent recent downdraft in prices, these loans may now in fact exceed the value of their collateral, and the rising tide of non-liquidity suddenly makes them appear to be much more risky, even as, paradoxically, Bloomberg reports that major collectors are clamoring for more art loans in the current environment to cover margin calls and other cash needs.

Of course, hopefully, most of this uncertainty will dissipate once economic conditions return to relative normalcy at some point in the future, but it does underscore the inherent volatility of art market prices, when a majority of works reside in what we have termed “dark matter” contexts and the pool of actual buyers is actually vanishingly small at any given moment in time, compared to the cohort of potentially transactable works as a whole.