Is the Art Market Recovering Ahead of the Economic Recession?

08/12/2010 12:43 pm ET | Updated May 25, 2011

The art market experienced lower artwork volumes at auction and decreases in prices during the recession in 2009. During the first half of 2010 though, secondary-market indicators, such as total worldwide sales for artworks sold and record-breaking artwork prices at auction, have suggested that the art market has recovered ahead of the economic recession. Rather than a full recovery, however, auction house total sales and record-breaking prices may reflect a very specific reaction to the recession, where a small percentage of rare artworks with exceptional provenance are commanding staggering new prices on the secondary market.

In 2009, the art market suffered from a decrease in confidence causing a dip in the supply of high caliber works and a decrease in demand for those works. Sellers withheld rare works from the market -- a decision fueled by fears of lower hammer prices and unsold works burned at auction. At the same time, demand decreased as buyers waited for exceptional pieces to return to the market and also believed that general art prices were due for a readjustment in an art market affected by the economic recession.

Despite continued difficulties in the broader economy in 2010, demand and supply in the art market have begun to recover as predicted by the Capgemini and Merrill Lynch 2010 World Wealth Report. The report, which categorizes how high net worth individuals (HNWIs) and ultra high net worth individuals (Ultra-HNWIs) allocate their assets to different portfolio sectors, foresees that in the coming year the art market will witness "sellers confident enough in demand to bring rare, high-value items to auction, and buyers proving especially quick to pay top dollar for one-time opportunities or, for example, rare items with extensive provenance attached."

Increases in auction houses' total worldwide sales and a new record for the most expensive artwork sold at auction this year are already confirming the change in the art market. In a Christie's press release from August 4, the auction house announced total worldwide sales for the first six months of 2010 were £1.71 billion ($2.57 billion), up 46% on the £ on last year's figure of £1.2 billion ($1.8 billion) for the same period. The following day, Sotheby's announced $2.2 billion in auction sales in the same six-month period, an increase of 116% on the prior year. The high totals for worldwide sales and improvements over the previous year's figures are the first indication of an art market recovery.

However, despite this data, the Christie's press release suggests that the number of high-priced artworks going to the auction block is still less than last year and buyers are willing to pay record-breaking prices only for a small selection of rare artworks of exceptional provenance. In the first six months of 2010, Christie's sold fewer works above £1 million - counting 169 works this year versus the 201 works during 2009; simultaneously, Christie's set a new record for the most expensive work acquired at auction when Pablo Picasso's "Nude, Green Leaves and Bust" sold for $106.5 million (£70.2 million). The combination of fewer works being sold above £1 million and the appearance of record-breaking prices depicts the cautionary manner in which the market is approaching the path to recovery.

While the idea of fewer works being sold over £1 million and the appearance of record-breaking prices at auction may appear to contradict each other, the trend of high prices for exceptional quality works during times of economic distress has appeared in the past. In "Art Market Analysis: Why works make records in a recession" in The Art Newspaper this past April, Lindsay Pollock confirms that some collectors are willing to pay record-breaking prices for a small segment of rare opportunities and works with significant provenance even during difficult economic times.

In an article written prior to the Picasso record-breaking sale, Pollock observes that several 20th-century milestones occurred amidst financial turmoil. Some examples include a 1931 sale, where Andrew Mellon bought 20 Old Master pieces for $7 million for a new national museum in Washington, D.C. during the Great Depression. In 1980, J.M.W. Turner's "Juliet and Her Nurse, sold for $6.4 million and in 1990 Van Gogh's "Portrait of Dr. Gachet" sold for $82.5 million to a Japanese buyer Ryoei Saito. These confirm that the Picasso record is not the defining signal of an art market recovery.

Collectors, and the art market more generally, must remember that these record prices are for a very select number of works to reach the auction block. The latest auctions and records reflect increased art market confidence, but can quickly be misinterpreted as a full-fledged art market recovery. In fact, too much confidence that the market has recovered could lead to the reappearance of irrational art market prices evident at the height of the speculative bubble in 2007-2008. It is only with reasoned and careful selling and buying during the fall auctions and upcoming European fairs that the art market will regain its strength and stability.