January 6, 2016

Is there a bubble in the art market?

Graph showing the dip in the art market in the early 1990s as well as the striking
recovery following the 2008/09 crisis, based on the top 500 artists and compared
to the development of gold and real estate prices, as well as the Standard & Poor's
500 stock market index. © Roman Kräussl / University of Luxembourg

(January 6, 2016)  Researchers at the University of Luxembourg are warning of an overheating art market, one of the fastest-growing investment sectors of the past decade, after applying a new bubble detection method analysing millions of auction records.

About market growth in the art sector

Few sectors of the market have rebounded as robustly as art—particularly contemporary art, which has doubled in value since the beginning of the financial recovery following the 2008/09 financial market crisis.

Pundits on the side-lines have commented that such market growth is unsustainable, warning there is a bubble in the making that is sure to burst, as seen in the early 1990s and in 2008/09. Headline-grabbing sales of post-war and contemporary works for over $100 million appear to support this argument. But is a bubble really forming?

Market bubbles are generally defined as a dramatic escalation in the volume of trading in assets at prices that exceed their fundamental value, followed by a sudden collapse. Rational expectations put the fundamental value of an asset as equal to its expected discounted cash flow. For most assets it is relatively easy to project this value—for example through dividends on stocks or rent on real estate. In the case of art, however, returns can rarely be correlated to costs of production.

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