What Happens to Art in a Financial Crisis?

US stocks took a major tumble last week, including a sixth consecutive day of losses for the S&P. Since uncertainty on Wall Street can have implications down the road, with the November art auctions around the corner, we want to understand how a sell-off could impact fine art.

There are two dimensions that need to be considered in an analysis of the overall art market: the volume of sales, as an indicator of liquidity, and the prices paid for individual artworks. In order to assess down-market performance, we took a closer look at data from the Great Recession and found the demand for fine art to be relatively resilient, even during a tough time for the US economy and global financial markets as a whole.

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A Deeper Analysis

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Yves Saint Laurent pictured with Matisse’s Les coucous, tapis bleu et rose, which fetched a staggering $45.6 million at Christie’s.

Turmoil in the global financial markets, which started in 2007, did not materially alter the volume of sales until 2009, at which time the high-end art market experienced a sharp contraction in the number of expensive artworks being purchased. This decline occurred just as stock prices were beginning to rebound, reaffirming the view that art lags equity markets by six to eighteen months. However, sales volumes did not diminish universally; in February 2009, for example, just five months after the collapse of Lehman Brothers, Yves Saint Laurent’s record-breaking collection brought in $483.8 million.

Despite some bright spots, in 2009, auction sales fell from their 2007 peak figure of $32.9 billion to $18.3 billion, but by 2011, the total exceeded $30 billion annually once again. The S&P 500, by comparison, took an additional two years to reach pre-crisis trading levels in 2013.

Art is Resilient

The art market self regulates supply and demand both in times of financial crises and financial excess.

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Willem de Kooning’s 1951 Woman, sold in November 2009 for $2.77 million —  short of its $4 million low estimate.

Based on MeiMoses, the leading art index at the time, from 2007 to 2009, auction prices fell by roughly 27.2%. Meanwhile, the S&P 500 fell 57% from its peak and hit a 12-year low on in early March 2009. “Looking at the data, the art world is resetting prices to 2004, 2005,” one of the creators of the index, Michael Moses, said in an interview with the New York Times. “It’s not resetting to the late ’90s like stocks.”

Remarkably, in 2008, the most difficult year for the art market, prices fell unevenly within collecting categories; while the Post War and Contemporary Index, which had increased by the highest percentage in the years leading up to the crises, slipped by 29.9%, the more established category of Impressionist and Modern Art declined by a mere 10.1%.

Systemic risk

One explanation for the resilience of the art market is its unique ability to self-regulate supply and demand. When there is relatively high liquidity in the market and the economy is healthy, art changes hands more frequently. In more uncertain times, the owners of expensive artworks, who are among the the wealthiest in the world, tend to hold on to their Warhols and Monets until markets become favorable once again. As a result of the reduction in supply, prices tend to remain relatively stable for works by established artists, while contemporary works with shorter histories experience more price volatility.

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