Art Market

How New Wealth and Evolving Taste Are Changing the Art Market

Doug Woodham
May 13, 2017 2:35PM

Installation view of Galerie Lelong’s booth at Art Basel in Miami Beach, 2016. Photo by Alain Almiñana for Artsy.

In his new book Art Collecting Today, former Christie’s president of the Americas Doug Woodham guides the reader through the ins and outs of the modern art market: where to learn about it, what’s out there, how the market works, and how to get your start in collecting. Today’s $57 billion art market, he writes, is shaped by means and desire: an unprecedented number of people with the resources to buy art, and a growing pool of people with the education and proclivity for its appreciation. He begins by laying out the facts and figures that underpin current and future demand for art, and explains what it means for the market. The following essay is adapted from the book.

Art is the ultimate discretionary purchase made by those who have the means and desire to own precious objects. The number of people with the means to acquire art has increased sharply, as has the subset that desires it.

Close to thirty-four million people around the world now have a net worth of at least $1 million, up from approximately fourteen million in 2000.  Further up the pyramid, 124,000 individuals globally are worth at least $50 million. The number of billionaires has also increased. My favorite measure of extreme wealth is the price of entry to the Forbes list of the four hundred richest people in the United States. In 2015, one needed $1.7 billion to join the club, almost twice what it was ten years ago. It is also a club that excludes many: 145 billionaires in the United States missed the 2015 list because the bar was so high.

But means alone does not make an art collector. Three factors are behind the increased desirability of art: education, exclusivity, and opportunity cost. The triumph of liberal arts education has led to greater awareness of art and higher demand for art and design in daily life. Almost sixty-nine million people in the United States now have four or more years of higher education, an increase of twenty-four million since 2000. Cultural literacy in this large pool of individuals is an important social requirement to effectively navigate the worlds of business, finance, and professional services. Once culturally literate, it is a relatively short hop to getting involved with the worlds of art and design and experiment with collecting.

Conventional and social media have also enhanced the sense of exclusivity associated with owning art. Museum curators share stories with me regularly about tours they lead where visitors are excited to see paintings they have only experienced digitally. Ironically, the easy availability of digital images has made the original artwork seem even more precious and valuable. Moreover, as high-quality clothing, restaurant meals, and vacation travel have become more readily available, many luxury goods and services are now viewed as far less exclusive and special. Unique objects created by artists, in contrast, have soared in perceived value. Owning them becomes a way to communicate social status and taste in ways no longer possible with many other luxury goods.

Finally, changes in financial markets have lowered the opportunity cost of owning art. Low interest rates make owning non-yielding assets like art more attractive. Since the financial crisis, the rate on one-year US Treasury Notes has been less than 1 percent, down from around 4 percent in the middle of the last decade. Banks and non-bank financial institutions are also now willing to lend money against a portfolio of high-quality art, upending the historical norm of art being a highly illiquid asset.

But as a discretionary purchase, collectors can easily elect to defer buying something. Likewise, discretionary sellers can decide to postpone selling work if they feel there may be a lull in buyer demand. Speculators eager to participate in the market when it is on an upswing can just as easily elect to sit out when there is market uncertainty. Taken together, this can lead to sharp changes in sale volume in the art market.

Consider, for example, what happened over the past few years in the market for especially valuable works of art. An important collector shared with me his notes from meetings with auction specialists in early 2015 when they were trying to entice him to sell valuable paintings in his collection by Pablo Picasso and Andy Warhol. They told him the auction market was at an all-time high, driven by new and seasoned collectors, and that many of the new buyers had no “price-point barriers.” When quizzed about what that meant, the specialists told him stories of extraordinarily wealthy new buyers intent on quickly building collections of masterworks by twentieth-century artists. Their drive and ambition made them comfortable bidding far above prices paid earlier in the decade. The upward spiral of prices also led many seasoned collectors to believe that the value of art had structurally adjusted higher, which made them feel comfortable jumping in. The auction specialists felt confident they had the inside track on demand because of their relationships with the exceeding small group of people willing to spend millions on art. They told him approximately 140 people worldwide had the means and desire to spend $50 million or more on a work of art. For objects worth around $20 million, there were maybe three hundred potential bidders, and at $5 million, the number was closer to one thousand.

To entice masterpiece owners to sell works in 2015, auction houses (sometimes in partnership with third-party speculative capital) took on enormous financial risks. Owners were given generous financial guarantees that their works would sell for at least a minimum price (e.g., $10 million), with a share of the upside going to them if the work sold for more than the guaranteed amount (e.g., 80 percent of the upside above $10 million).

Competitive pressures between auction houses led them to ante-up guarantee amounts and upside-sharing percentages as potential sellers played them off each other. Specialists acquiesced to these demands to keep their auctions full of high-status artworks. Their actions were reminiscent of financial institutions in 2007 right before the financial meltdown, when Charles Prince, then-CEO of Citigroup, famously said “As long as the music is playing, you’ve got to get up and dance.” But many of these guarantees soured when buyers were unwilling to stretch as far as auction house specialists estimated. It turns out that 2014 was the market peak.

The financial pain auction houses suffered caused them to be far more parsimonious when negotiating guarantee deals in 2016. With less of this protection available, many discretionary sellers elected to sit on the sidelines. The supply side effects of fewer masterworks from discretionary sellers and less work being sold because of the traditional 3Ds (death, divorce, and debt-related problems) contributed to a drop in auction sales. Christie’s and Sotheby’s reported first half sales in 2016 were off by almost 30 percent.

But when great work did come to market, some members of the extremely small group of buyers with the means and desire to spend millions on art still elected to show up. In June 2016, Sotheby’s offered an Amedeo Modigliani painting of his common-law wife, Jeanne Hébuterne. Modigliani painted her fully clothed and sitting upright in an armchair. It sold for $56.5 million.

Means and desire extends to living artists as well. Work by living artists is often easier for new collectors to appreciate, because it is an expression of the zeitgeist in which they live. Interest in living artists is at an all-time high now, in large measure because there are simply so many new collectors. Many established collectors who understand the full sweep of art history also like trying to “see around the corner” and enjoy buying work by living artists who they believe have a chance of making it into the history books.

At the very top of the artist pyramid is a small group, no more than three hundred to five hundred artists in my estimate, who today likely earn in excess of $1 million a year. They tend to be represented by the best galleries, enjoy support from important museum curators and tastemakers, and make work that is generally easy to recognize. Gerhard Richter is at the top of the list with $1.2 billion of sales; David Hockney is twenty-fifth with $73 million of auction sales.

Moving down the pyramid, thousands of artists are now able to sell enough of their work to earn at least the median household income of $56,500. A middle-class life, combined with the chance to become an art-market superstar, has led more people than ever before to pursue being a professional artist.

Doug Woodham
Doug Woodham is Managing Partner of Art Fiduciary Advisors, former President of Christie’s for the Americas, and author of _Art Collecting Today: Market Insights for Everyone Passionate About Art_.