Art Market Research based on Art Market Prices and Art Indexes
Artists, Art Markets & Art Market Price Determinants
The most important tasks of art market research are analyzing past sales results and forecasting future trends. Art valuations, art appraisals, and various statistical techniques to estimate art market prices play a crucial role. The knowledge on the key drivers of the financial performance of artists or art categories and the entailed risks of investing in them are valuable information to art investors. In order to perform such in depth art market analysis in practice, some fundamental considerations on the characteristics of art as an alternative investment, on art market forces and participants, and finally on art market price determinants have to be made.
The most distinctive features of original art are heterogeneity and singularity. Both of them are obstacles to frequent tradability and finally to estimated financial performance measurement. Commodities such as oil or wheat are quite homogenous. On the other hand commodities are not durable. Most art objects are durable; exceptions are performance art or art intervention. Here, also, art disappears after consumption. Heterogeneity means that a particular piece of art is hardly interchangeable; singularity means that it is truly unique. For financial art investors, both qualities cause illiquidity and raise authenticity questions. Financial art investors make a bet on future value appreciation. Like any other financial investor, they hope that the value of their art pieces will increase over time, or that the works will at least store value. Very similar to investments in shares, the acquired work can also become a disappointment. Depending on the fame of an artist, or on the quality of the work in general, some art investments can be more speculative than others. Investing in a start-up or a young and rather unknown artist is usually more risky than investing in listed multibillion dollar companies or premium art. The risks and uncertainties involved make art investments speculative in a way that is similar to equity investments.
Another noteworthy characteristic of art is that it belongs in the category of consumption and investment goods. Like real estate, art offers psychic returns that are characteristic of durable consumption goods and financial returns that are characteristic of investment goods. The psychic returns are various forms of pleasure and satisfaction gained through the art pieces’ aesthetics and social or cultural value. The art investor can be attracted by the fact that he or she simply likes the piece - for instance, the subject matter, technique, support, etc. - or it may have a positive impact on his or her social status by the mere fact that the owner possesses the work of a famous artist. These returns are difficult, if not impossible, to price accurately.
The financial art market returns relate to the object’s expected value appreciation - true or estimated - over time. The art market price changes can be assessed based on either multiple sales of the same art object (repeat sales), e.g. hammer prices of art auctions, or on estimates like art valuations put forth by art advisors, art insurance estimates, or statistical calculations (hedonic regressions) based on past sales data of the same artist as suggested by our art market research. Unlike other investments, art investments usually do not yield a monetary dividend. However, owning a famous art object can result in a stable influx of funds. Paintings are displayed in private museums charging admission fees, or they are rented for display in art shows in exchange for cash. Other examples for monetary dividends of art are reproduction fees for lithographs or tax savings in some countries.
Art has additional attributes in common with other tangible assets such as real estate or precious metals: a residual value and inflation proofing. The value of an art investment can decline considerably but will never go down to zero. Some art investments have low or negative correlations with traditional asset classes. This can make them a highly effective alpha generator. Therefore it can be suggested that adding art, between 5% and 20%, to an existing portfolio of traditional assets may generate higher overall yields based on a diversification strategy without corresponding risk. Consequently, most art advisers find that investing in art is a good approach to balance stock market volatility. A combination of low risk, low yield and very high risk, high yield works best. In both cases, depending on the artists chosen, art can be of good service. Despite this, many art market research reports conclude there are no diversification gains in combined art and financial assets portfolios, whereas they do exist in portfolios solely consisting of diversified art.
Much has been written about supply and demand in art markets. The supply for art is more inelastic than for financial assets for the following reasons. First, the number of art works from already deceased artists is limited. The death of well-known artists often leads to an art market price increase, the so-called death effect. Potential art investors expect that the future supply will decrease and therefore art market prices will increase. Recent art market research confirms the death effect, particularly for premium art. Secondly, many of the most famous art works belong either to important private collections or are blocked in public museums. These objects may only be available in case of death, debt, divorce, or dissolution. Even when an artist is still alive and working, she might not be willing to create reproductions of a successful period back in time, just to meet art market requirements. Third, the singularity of art often creates a situation where art markets demonstrate extreme inelasticity because demand for a particular art piece by far exceeds supply. The last point to mention is the behavior of art galleries that sell primarily contemporary art. They protect and support their artists actively. They want their works to be present in important collections and are not interested in an inflating market. By restricting the number of art objects for sale, and the fact that not all customers qualify, the supply becomes inelastic.
There are many factors that affect the price of an art piece within the different art markets. To name just a view: singularity of the art object, peer artists, supply and demand of works, opinions of validators, consumer taste, and overall economic situation. The main art market price determinants can be divided into four groups: the characteristics of the artwork, the fame of the artist, the conditions in the art markets, and external (macroeconomic) factors.
The factors relating to the work of art are the most obvious art market price determinants. They are relatively straightforward to capture and compute the respective statistics. Our art market analysis approach includes variables such as: type and quality of the work, subject matter, technique and support used, the dimensions and size, the authenticity and condition of the work, the year of creation, signature, date and place of sale, rarity of the work, and provenance.