The art market bubble has burst
The most comprehensive global art market index, compiled by Prof. Roman Kräussl at the Luxembourg School of Finance at the University of Luxembourg, shows that the price for post-war and contemporary art fell by 21 percent in 2016, confirming his warning of an overheating market.
"The speculative bubble has burst," commented Prof. Kräussl, an expert on alternative investments. Between 2009 and 2015, prices for post-war and contemporary art had more than doubled and climbed far above their long-term price trend. Previous research published by Prof. Kräussl warned that the art market showed signs of overheating. By analysing more than one million auction records from the past 36 years, examining six major art styles, Prof. Kräussl and his team identified a trend similar to previous speculative bubbles in the 1990s and in 2008/09.
His new art market index, compiled for German publication manager magazine, appears to confirm Prof. Kräussl's previous warning. Total auction sales for fine art declined by 29 percent in 2016, even though a larger number of paintings were sold than during the previous year. The average price per work dropped from 160,000 US dollars to 108,000 US dollars. Even paintings by leading artists such as Francis Bacon, Mark Rothko and Roy Liechtenstein suffered a 20 percent drop in prices. Most other art market segments, from Impressionist to modern art to the Old Masters, also witnessed a strong decline in price.
"2016 was the year the art market crashed," concluded Prof. Kräussl. However, "prices near their long-term trend suggest that there should be a recovery of the art market in 2017," he added. Indeed, Jean-Michel Basquiat's painting "Untitled" (1982) sold for 110.5 million USD at Sotheby's in New York this May, breaking the artist's previous 57.3 million USD auction record. Media reports of a recovery of the art market, however, are premature, according to Kräussl. "Several high-value art works were withdrawn from auction last minute due to a risk of failure to sell," he explained. Recovery from last year's correction in the market might be underway but returns in art as an investment should remain flat for the time being. "You should by a Basquiat if you like looking at it," Prof. Kräussl concluded, "but not solely as a strategy for wealth creation."
The manager magazin global art market index is based on over five million sales data by more than 700 auction houses. In comparison, Sotheby's Mei Moses art index consists of only 45,000 data points. Other art market reports contain hardly any price data and are based partly on non-verifiable survey data given by gallerists. For example, the TEFAF Art Market Report stated a price decline of 8.6 percent for the whole art market for 2016, but claimed a price increase in the post-war and contemporary art categories by 4 percent. This contradicts the observed decline in publicly reported auction prices.
Prof. Kräussl's calculation method has recently been published in leading economic journals such as the Review of Financial Studies and the Journal of Empirical Finance.