Is there a bubble in the art market? Sales of high-end works defy expectations amid an expanding pool of oil-rich buyers.

NEW YORK (Fortune) — Luxury these days is a tale of two markets: consumers continue to snap up high-priced Louis Vuitton bags even as they balk at paying full price for Coach handbags. The same can be said of demand for works of art.
Recent auctions of high-end art on both sides of the Atlantic have been a huge success. The sales, fueled in part by rich oil barons, have defied expectations that a shaky global economy would curb demand.
In London, works by Claude Monet and Jeff Koons fetched stratospheric prices, with Monet’s water lilies masterpiece, “Le Bassin aux Nympheas” selling for $80.5 million last week – well above its $47 million high estimate. In May, Francis Bacon’s “Triptych, 1976” set the record for most expensive contemporary work at auction when it sold for $86.3 million at Sotheby’s in New York.
Trendy categories like post-WWII and contemporary art have seen triple-digit price gains since 2002, but the boom was supposed to end after the credit crisis hit last summer. Instead, buoyant sales are just the latest example of a market that seems impervious to the downturn driven by climbing oil prices, a floundering financial sector, and a looming U.S. recession.
One reason the auctions are still buzzing is the influx of commodity-rich buyers who chase trophy works and push prices to ever-loftier heights. Roman Abramovich, a London-based Russian oligarch, reportedly bought two of the top works at the New York sales in May: the $86.3 million Bacon triptych and Lucien Freud’s “Benefits Supervisor Sleeping,” which sold for $33.6 million, making Freud the priciest living artist.
Meanwhile, the Al-Thani family of Qatar was the reported buyer last year of Mark Rothko’s “White Center (Yellow, Pink, and Lavender on Rose)” for $72.8 million. It was the highest price for a post-war work sold at auction at the time – a title now held by Bacon’s “Triptych.”
Signs of softness
This trophy-lot frenzy, however, has obscured some underlying weakness.
“We have two markets going on,” says Ian Peck, CEO of New York-based Art Capital Group, which provides financing against art assets. “There’s the super-rich market, which is very active right now. Then there’s the middle market, which is soft and patchy.”
According to research firm ArtTactic, works priced at more than $1 million made up about 70% of the contemporary art auction volume this year. Lower-priced pieces, which are offered by the auction houses at day sales rather than at the high-profile evening auctions, were more likely to sell below their top estimates or to fail to sell.
This softness shows that middle-market buyers are balking at rapidly escalating prices. For example, this week Christie’s featured six works by Damien Hirst at its day sale in London. Two didn’t sell, including a medicine cabinet that was estimated at $690,000 to $880,000. In its last auction four years ago, the Hirst piece fetched $212,000, nearly three times its top estimate.
The high-end market, on the other hand, has been resilient thanks to a buyer’s pool that is bigger and more global than ever. As recently as the late 1980s – when Japanese buyers bid up Impressionist art – American and European collectors were the only other major players, says Olivier Camu of Christie’s in London. When the Japanese economy faltered, so did the art market, and prices fell precipitously in the early 1990s.
“The reason the market is doing so well is because it’s so much deeper and broader,” says Camu. Big bidders now also hail from the former Soviet Union, the Middle East, and Asia.
With growing demand for a limited supply, quality has been able to command record prices. The $80.5 million Monet, for example, was a rare masterpiece in top condition whose companion paintings are in museum or private collections or, in one instance, damaged.
Still, observers question whether even the trophy-art market can continue to soar as economic conditions deteriorate. “We think if there is a shift it could happen quickly,” says Peck. “It would take one or two major pieces to do poorly, and that could trigger a chain reaction. It’s a very neurotic sort of market.”

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LONDON — There are enough “recession-proof,” super-rich buyers to push soaring prices for the best works of art still higher, experts predict, but the picture is less rosy at the lower end of the market.
And in a world where perception is everything, values for even the world’s most sought-after artists could come back down to Earth with a bump if confidence were to slide.
Christie’s and Sotheby’s, the world’s two top auctioneers, have just completed a series of summer sales in London that raised more than $1-billion, underlining how resilient the top end of the market is despite growing economic gloom.
Records tumbled and bidding was aggressive in the sales room, such as last week when a Monet water lily fetched the equivalent of $81.4-million Canadian, doubling the previous high for the French master.
Christie’s raised $558-million overall during the London summer season of impressionist, modern, post-war and contemporary art, while Sotheby’s has raised $454-million with just the relatively minor contemporary day sale to go.
“At the high end of the market there is a combination of extreme wealth and a lack of alternative assets for these people,” said Anders Petterson, founder of ArtTactic, which tracks confidence in the art market.
“Auction houses are appealing to largely recession-proof buyers, including wealthy individuals from the Middle East, Russia and India.”
But falling share prices, inflationary pressures and rising costs of oil appear to be taking their toll on the middle market.
At the Phillips de Pury contemporary art sale on Sunday, one-third of lots on offer failed to sell and the auction total of around $49.5-million fell short of its low pre-sale estimate.
“It’s evident … that the high end of the market (over $1 million) is currently operating independently from the lower price segments,” the latest ArtTactic survey concluded.
Best art on show
The sharp rise in values for high-quality art has encouraged owners to part with their best paintings and sculptures.
“It can be good news for the art market if some people are hurting because of exposure to other assets, because it gets them to put works on the market they probably would have preferred to keep,” said Ben Crawford, chief marketing officer at MutualArt.com, an online art information service.
He, like Petterson, sees values for the best works of art continuing to rise, and takes issue with the theory put forward that prices could be heading for a fall.
At the back of people’s minds is the art market crash of the early 1990s, and comparisons have been drawn between the bubble created by Japanese buying then and aggressive Russian collecting today.
“There’s an argument that there are a few rogue billionaires propping up the market, but that is clearly not the case,” Crawford said.
While generally confident, ArtTactic’s Petterson warned that psychology plays a big part in a market where the perceived value of brushstrokes on a piece of canvas was everything.
“The problem is when people in the market start to question and become uncertain,” he said.
“There could be a political or economic jolt that is so dramatic that it distracts people at the high end of the market, and it is like a house of cards.”

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If you’ve got a bruiser of a Francis Bacon on your drawing-room wall then you have probably grown used to its visual punch. You may not want an Impressionist next. However lovely a painting by Alfred Sisley may be, with its pointillist dots scattered daintily across the canvas, it will look like a wimp in a competitive arena.
This may be one of the reasons why Sotheby’s salesmen are so hopeful about the Expressionist canvases. A painting by one of the Fauves, for example – the short-lived, turn-of-the-century art group that took its name from the French word for “wild beasts” – will hardly fade into the wallpaper. The strident colours, the glaring designs, the dramatic brush work of André Derain or Maurice de Vlaminck can hold their own against even the brashest taste in interior decor. These are pieces with “wallpower”, as the art traders put it.
The market may be small but it is growing crowded. Chinese industrialists, Middle Eastern sheikhs and Indian entrepreneurs are battling against American tycoons and hedge fund investors. Then there are the Russian oligarchs. There are simply not enough great works to go round. We are running out of big names. Picasso may have been prolific, but he couldn’t supply today’s global market.
Yet the newcomers still want their showy brand labels. Forget musty Old Masters, lost in the yellowing mists of their chiaroscuro. Art is about prestige as much as paint. And many want a painting to have the same effect as a Porsche.
The contemporary, of course, can cater for that, but perhaps collectors are battening down the hatches. They want blue-chip stock. That may be why they are looking back to the classics. The Fauves may have been short lived, but at least they caused a commotion – and briefly included such A-listers as Matisse.
Of course, the great Modernist classics – Monet’s Waterlilies, for example – will always be coveted, but, rather than going for some third-rate work by this master of shimmering tranquillity, perhaps today’s collectors prefer the loud splash.

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