The record-breaking prices observed in the art market over the last five years raise the question of whether it is an ongoing boom or whether we are experiencing a speculative bubble.  The authors of a recent study warn that the current level of growth is unsustainable.

Given the difficulty to determine the fundamental value of artworks, Roman Kräussl, Thorsten Lehnert, and Nicolas Martelin from the Luxembourg School of Finance have set out to detect explosive behaviours directly in the time series of six different art market segments for the period from 1970 to 2014. In an article published in the Journal of empirical finance (Vol. 35, Jan. 2016), the authors  identify two historical speculative bubbles and find an explosive movement in today’s “Impressionist and Modern”, “Post-war and Contemporary”, “American”, and “Old Masters” fine art market segments. While acknowledging the robust state of the global art market since the end of the financial crisis of 2008/09 and emphasizing the strength of the contemporary art market which has doubled in value during the recovery since, the study warns that the current level of growth is unsustainable, concluding that the current art market is showing signs of overheating. According to the study, this would create the conditions for a “severe correction” or potential crash in the post-war and contemporary, American, and Old Masters categories.  (Source ArtNet News)

The authors of the above article are not alone on seeing a pending correction in the art market. A recent issue of The Wall Street Journal carried an article headed ‘A widespread chill in art prices’ noting “The art market appears to be entering its cooling-off period. For the past six years, an influx of newly wealthy collectors—particularly from China—has pushed up prices for everything from Ming vases to Claude Monet, but now there are signs that the bidding paddles could come down hard.” It describes the auction houses as “already bracing for retrenchment.”  Both Sotheby’s and Christie’s saw sales fall in 2015, another possible sign the art market may be cooling. The first two auctions of the season in London saw the emergence of what the Financial Times described as ‘A changed and more discerning market.’  While the best works attracted good prices, according to the Art Newspaper 22% of lots offered failed to sell and 49% sold at or below their lower estimates. The total take at London’s series of impressionist, modern and contemporary sales was £412m, while the equivalent figure for last year was £580.4m, although the £58.1m (with fees) achieved at the Christie’s evening sale saw a morale boosting 89% of the lots sold, with big prices for well established British names such as David Hockney, Lucian Freud, Peter Doig and Francis Bacon.