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Hammer Horror

After a decades-long boom, the art market has dramatically downshifted, but what will it mean for the auction houses? Diane Mehta reports

Art is in a pickle, and this time it’s not the latest Damien Hirst creation. The global art market, which includes auctions and private sales, grew 95% from 2002 to 2006, hitting a high of €48.1bn, according to Dublin-based researcher Art Economics. Last November it all tanked. At that month’s auctions in New York, Christie’s and Sotheby’s ran up $63m in losses from guarantees they had given on artworks that didn’t sell.

As the biggest beneficiaries of a decade of double-digit growth, these two auction houses stand to lose the most. Despite a constant stream of press releases claiming excellent auction results on everything from porcelain to fine wine, behind the scenes they are worried: Sotheby’s and Christie’s laid off 60 and 100 people, respectively, recently, with a total of 250 cuts planned at Sotheby’s and 300 at Christie’s. Sotheby’s stock is hovering around $10, from a high of $61.40 in July 2007.  

Very few onlookers feel any sympathy. For one thing, the two venerable, London-headquartered auction houses control the lion’s share of the market, with Phillips de Pury & Company a distant third. Successful online start-ups like Saffron Arts in India (whose sales grew 15,000% from 2001 to 2007) have managed to make a dent by holding internet auctions for Indian art, but for big-ticket items, Sotheby’s and Christie’s rule, with more than 87% of the high-end market.  

Worse, the duopoly got greedy (quite apart from the 1993 price-fixing scam, which tarnished their images). In the last few years, auction houses have astronomically raised the buyer’s premium on artwork — what buyers pay beyond the hammer price — ensuring large payouts on big-ticket art and a stream of cash from high-volume, lower-end sales. Today, Christie’s and Sotheby’s charge 25% on work up to $50,000, 20% between $50,000 and $1m, and 12% above $1m. Buy a painting for $1.5m, and you’re out another $180,000.  

It’s not just art that’s suffering: it’s the whole auction business. Blue-chip Bordeaux wines are down 22.9% from their April 2008 peak, says Stephen Bachmann, CEO and founder Vinfolio, reflecting a general downward trend of 20%—25% across the board. Suddenly a 1982 Latour, averaging $1,663 at auction in 2008, is a relative steal at $1,198, according to Vinfolio’s Wineprices.com.  

But the fine art market is the biggest sector — dwarfing all others — and Contemporary art is the gorilla. However, according to Artprice, which tracks auction sales, Contemporary art lost 34.4% of its value in 2008.  

“We’ve been on a bull run since 1994, so it was due a correction,” says Clare McAndrew, who runs Art Economics. There are already suggestions that artists like Damien Hirst, Richard Prince and Takashi Murakami — interestingly, all represented by the hard-driving Gagosian Gallery — are the art equivalent of Lehman Brothers: poised for a tumble.  

“Sellers don’t want to sell low, buyers know they want 40% off, so it’s a tug of war,” explains Ethan Cohen, a dealer and consultant in Chinese art, the popularity of which has exploded in the past decade. The problem is figuring out who’s going to stick around for the long haul. Top-shelf Chinese artists like Zhang Xiaogang will endure, but inevitably there will be a shake-down, says Cohen. “People bought anything that was Chinese, if it had feet, Chinese people bought it,” he admits. 

The signs seem to warn against investing in Contemporary art. “What you must do is measure them against themselves — Old Masters didn’t go up as much and Impressionist and Modern art went up much less,” says Neal Meltzer, art dealer and former head of Christie’s Contemporary Art department. “The clearest conclusion was that there were big run-ups in Contemporary art, just like in the housing sector and the internet, and that’s the area that will come down the most.”  

The trends pan out at the London-based Art Market Research, which tracks price movements. Its Contemporary Art 100 index shows that for 28,000 works sold from 1987 to 2009, it went up 993.3% in dollars; in the same period for the Old Masters 100 index, only 18,092 works were sold, increasing 517.8%. To compare with less aggressive sectors, Rolex watches increased 160.4% and Belle Époque and Art Deco jewellery 205.9%. 

Meanwhile, in the last few decades, the whole structure of the art market has changed, and might need to change back before it can be restored to health. It used to be that the galleries representing the primary market (living artists) and secondary market (resales) were king. Then art became a luxury item. Shopping mall mogul Alfred Taubman bought Sotheby’s in 1983 and luxury goods magnate François Pinault bought Christie’s in 1998 — both took an aggressive, retail approach to art. (Mercury Group, the Russian luxury distributor, bought Phillips de Pury in 2008.) Auctioneers put out glossy catalogues and threw parties to attract Wall Street wealth and new money; speculators flipped art at auction, which drove prices up. Meltzer says the emphasis on marketing to high-end new buyers, along with financial guarantees, attracted trophy seekers and took business away from the private market: “New wealth was more comfortable bidding in the auction room, fighting it out in that arena, rather than buying from dealers.”  

Now much of that wealth has disappeared, and the seller’s market has become a buyer’s market: speculators are out; auction houses have dropped guarantees.  

Meltzer thinks it signals a power shift: “It’s very clear that the majority of sales in the art market are going to be less public, meaning more in the dealer and secondary market. That’s a typical part of a boom and bust cycle. As a bust takes place, it’s about risk aversion. Sellers’ risk was limited when they had a guarantee, which was the equivalent in the art market of a stop-loss order. Now you no longer have that kind of incentive.”  

This means dealers may gain an edge, but, art adviser Thea Westreich says it’s an equalising moment: “A lot of gallerists who have been pressured by their artists and market to raise prices, especially on young living artists in the primary market, will be more sober.”  

Even as Lehman Brothers folded last September, Sotheby’s defied the downturn and the dealers when the following day it hosted Damien Hirst’s unprecedented direct-to-auction sale, bypassing his dealers completely.  

McAndrew says it doesn’t end there: “Auction houses are doing more private sales, and they’re getting up the noses of a lot of dealers.” For example, Christie’s took in $5.1bn from global art sales in 2008, but also sold $487m privately. “Auction houses are coming in through the back door, buying dealerships to get into art fairs,” says McAndrew. However, she adds: “Dealers act more and more as agents. Dealers used to buy a collection outright then sell it, so they’d take on more risk; now they are more like agents, working on commission — the auction house model.”  

Marc Porter, president of Christie’s Americas, says the distinction between a dealer and an auction house is a fine line, and the question is really about which distribution method is the most profitable for the seller. He imagines a future where an established artist sells at auction without the constraints of a dealer: “Artists, free from having an obligation to only one dealer who controls her market in a particular region, are given access to the markets around the world.” Top-level dealers, Porter points out, typically sell the best works to an established client roster, not the general public, and some require that they handle any resale of the artwork as well.  

However those relationships and roles morph, the big worry is that people won’t part with their artwork so easily anymore. “It’s a supply-driven marketplace,” says McAndrew. If works are kept off the market over concern they’ll be devalued if they don’t sell, prices go down and that scares more sellers off, creating a vicious cycle. “What everyone wants is steady, slow increases in prices, versus sales that can’t be sustained,” she adds.  

But while economic globalisation kept prices at unsustainable levels, it’s that global audience that may help the market bounce back. “Dubai and Hong Kong encourage free trade, and these will be the centres people sell and buy from,” says McAndrew. New centres, together with the internet and art fairs, diversify the market, so insulating it from what might have been a worse downturn.  

George Sutton, senior research analyst at Craig-Hallum, agrees: “In past cycles you saw the US and Europe as the predominant markets — today, add the Middle East, Russia and China. I think demand can come back more quickly than people realise, and may be driven from outside the US and Europe.”  

However, looking at the results of Christie’s Yves Saint Laurent sale in Paris in March, one might think there was no credit crisis. It was the highest total for any single-owner collector, with several record-setting sales, including a Matisse painting that went for $40.9m. And, most of the buyers were European. 

For Meltzer, it proves that, for serious collectors, a good opportunity trumps day-to-day economics: “These type of assets trade generationally; they don’t trade daily like stocks and bonds. Therefore, does it matter what you pay for it right now? Of course it matters, but enough great collectors know rarely when they passed on something did they get it later for less.

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June 2009

Art & Books, Spotlight

Hammer Horror

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