Art and Auction: Why do paintings cost so much?

On May 13th, 2014, Christie’s post-war and contemporary art auction at New York witnessed one of the most competitive telephonic bids for Barnett Newman’s Black Fire I resulting in a whopping final price of $84,165,000. To an unassuming eye, this painting was rather simplistic with a few color strips on a canvas. However, such events with mind-numbing bidding prices and auction values aren’t uncommon in the high-end and ultra-high-end fine-arts market. The net auction price of the ten costliest paintings sold in 2020 was more than $450 million that rivals that of Salvator Mundi ( $450.3 million, Sold in 2017 ), the most expensive painting ever sold in an auction. These figures don’t include the sales made in private auctions or that of dealers whose pricing mechanisms are even more opaque, to say the least.

Black Fire I — Sold at $ 84 Million*

The art & the antique sector has always received a fair share of criticism for a subjective pricing method and an uneven hold of a few individuals over what is considered high-quality art. Other than the artists there are a lot of stakeholders ranging from dealers, curators, art consultants, critics, auction houses, museums, and collectors which have an influence on the price and relevance of a particular artist’s work.

Naturally, these events garner huge amounts of attention and shape an outsider’s view of the art world filled with exhibitions and art fairs as confusing at best and corrupt at the worst. However, there is a complex potpourri of factors and network chains that influence the dynamics of this ‘elite’ market coupled with a seemingly close yet distant subsector of low and middle-priced arts which often do not gather much-deserved attention outside of the mantle pieces and decorations in drawing rooms and meeting halls.

Art and Antique

Even with one of the steepest declines of the decade (22%) owing to the pandemic, closed-off art fairs, and travel ban, the Global Art market reached an estimate of $50 billion, fairing it much better than what most economists and analysts expected. This was partly driven due to the quick adoption of online channels and virtual fairs along with high-value sales in Hong Kong and China in the second half of the year because of relatively earlier ease in lockdowns. US (42%), UK (20%), and China (20%) continued to be the art hubs of the world with net online sales doubling to $12.4 billion.

China overtook the US as the leading market for public auction for the first time by capturing 36% of net sales by value with the US trailing closely at 29%.

Art galleries have always concentrated in economic centers of the world with New York, London, and Hong Kong being some of the key venues. A network of galleries, publications, critics along with a healthy supply of High Net Worth Individuals as collectors constitute a dynamic market that isn’t driven by market economics, at least not in a conventional sense.

Market Segmentation

Due to the highly publicized events and bidding prices, often the art world is misrepresented as one of the highest margin markets. However, the segmentations are more nuanced and deserve closer scrutiny.

In 2020, paintings priced below $50,000 comprised 92% of total volume with a meager 12.4% in terms of value. In Postwar and Contemporary ( Painting created by artists born after 1910) which has been the largest segment of Fine Arts for the better part of the decade, 58% of the total volume is sold below $ 1K with the art of just 50 artists driving 72% of the total value.

These figures show that the market is highly skewed towards fewer artists in terms of value while a majority of the artists get relatively low amounts for their art. A look at the value chain of artworks might hold some insights into the selective nature of this industry.

New or Old

There is a significant difference between the way the primary and secondary markets of this industry work.

Primary Market includes the art which hasn’t been sold earlier. It often involves a dealer eyeing a new and upcoming artist through their network of other artists, art fairs, exhibitions, personal studios, etc. If the dealer decides to collaborate, they would put significant effort in terms of branding of the artist as well as the art. Several dealers specialize in a particular genre and focus exclusively on that.

The network and brand of the dealer play a huge role in deciding the future opportunities for the artist. Many dealers have their own galleries where the art is showcased either to the general public or to select individuals. They also have a huge influence in deciding the price of the painting.

The price can’t be overhyped too much even if the financial incentives of both dealers and artists align because of a risk of the painting remaining unsold which might significantly damage the reputation of the artist thus making the entire investment useless along with potentially souring the relations between the influential clients and the dealer.

Once one of the paintings is sold to a collector or a museum, it sets a benchmark for further paintings made by the artist. The price eventually might go up given the market conditions which often include interests shown by art critics, or a highly reputed collector, stories associated with artists, etc.

The high-end market is driven by exclusivity thus it is in the interest of the dealer to allow the artists to work on their arts for a longer duration of time often leading up to years-long collaborations which leads to fewer artists in the high-end circle albeit often producing superior quality art.

Factors that matter

If a painting of a different era is discovered by dealers, the price is often determined by its quality, aesthetics, colors, the method of painting, size of the canvas, proof of originality, and its relative condition.

Factors that really matter

However, secondary factors such as the market trend of the particular era, liquidity in the market, the popularity of the artist, the exclusivity of the painting i.e. number of paintings created by a given artist available in the open market and even the age of the artist at the time of creating the art affect the price.

Other than this, the brand of the dealer and the gallery, critique of publications for the painting, recent price of paintings of similar age or artists in similar phase as well as ownership of the art by historically or conventionally well-regarded collectors all have a huge impact in determining the price.

Art of the auctions

Although the primary market is hugely dominated by galleries and dealers, the secondary market involving reselling of the art is actively influenced by auction houses such as Sotheby’s, Christie’s, and Philips.

Salvator Mundi ( Leonardo) — Sold at $450.3 Million*

Sometimes, the dealers and the auction houses compete to get exclusive rights to the paintings, however, auction houses have more free market-like behavior given the transparent bidding price of the public auctions. Dealers are more focused on maintaining the relationship with their clients while auction houses have their portfolio and salesroom as their primary concerns.

There are often speculations of the dealers hindering reselling of the art in the secondary market because of its potential impact on the prices of their existing portfolio, thus sometimes leading to artificial increment in bids as well as shared understanding between owners and galleries regarding conditions for reselling of the art.

Also, other than the indirect effect on the primary market paintings, the artists do not benefit from the sky-high prices showcased in the auctions. The primary beneficiaries are the auction houses that collect margins as well as previous owners of the paintings.

Who are the collectors?

Collectors of high-end art are often multi-millionaires and billionaires. The art collection has been historically seen as something associated with prestige or social cader, however, more and more collectors are getting attracted towards this market for more ‘materialistic’ reasons such as investment returns and tax benefits. Art investment if done properly can lead to huge returns with the value of the given asset tripling or quadrupling in a relatively short duration. The sudden popularity of new artists or significant markups in one of their artwork can lead to an increment in the worth of all of their paintings. Tax benefits associated with museum donations are one of the biggest reasons why so many privately owned works of art are often showcased in public forums. Tax rules allow the owners to write off the “current value” of the art they donated which is often multiple times that of originally paid price as charitable donations thus resulting in huge benefits. However, certain changes in the legal framework such as the ‘ 5th Anti-Money Laundering Directive’ in Europe which forces the auction house and dealers to maintain an effective KYC (Know Your Customer) might impact the relationship between sellers and their more discrete buyers.

Online forums and NFTs

The rise in popularity of online forums has given artists a broader reach and a wider audience. The recent doubling of revenue via online sales is a strong indicator of this trend however whether this would continue to grow in a post-pandemic world in an industry where the feel and in-person audience with the art has been a key driver still remains to be seen. Another key caveat is that although it allows newer artists a better platform, a majority part of the online segment is still driven by major galleries and auction houses, thus it can’t yet be concluded if digital adoption would be a leveler in this highly skewed industry.

NFTs or Non-Fungible Tokens have suddenly gained huge traction as the next step towards digital art. This allows the artists to receive potentially high sums of money as well as royalty whenever the painting changes ownership. But, whether it would replace physical art or can affect the hold of major auction houses ( Beeple, a digital art NFT sold at $ 69 Million was sold by Christie’s, one of the largest auction houses) or whether it is simply a fad with over-hyped prices for artworks of questionable quality, this requires a separate analysis on its own.

Conclusion

So, why do we keep hearing about insanely high-priced paintings? The answer is because a select group of artists and artworks have been given credibility by another select group of collectors, galleries, art critics, and dealers further facilitated by auction houses in this opaque market for various reasons including financial and social incentives. Free market pricing for something so subjective will always have its issues as we will probably see if NFTs get more democratized. The current model driven by the galleries requires a lot of changes if it has to allow more artists to flourish rather than a few select ones but incentives for this change aren’t aligned across the industry thus causing higher inequality of opportunities and less transparent markets.

We still see astonishing pieces of art either beautifully preserved or newly created from time to time which forces us to reflect and be amazed at once. The value of a “Starry Night” or “ The Scream’’ is probably much more than its current market price, it is embedded in the generations of artists they have inspired. That’s why it is imperative that this industry is recalibrated and restructured to provide a stable and fair opportunity to a much larger number of artists.

Resources :

  1. https://artbasel.com/about/initiatives/the-art-market

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