How art is like houses

August 3, 2009

If the price of art falls, that means that now is the time to buy. This is the kind of rhetoric we’ve been hearing from real-estate professionals for a while now, repurposed by their counterparts in the art world:

Prices of works by artists born after 1945 have fallen nearly a third since a late-2007 peak, according to widely used market data compiler Artprice, and analysts say this could be a great time to get in.

Remember too that if the price of art rises, that also means that now is the time to buy:

The odd high-profile sale has underlined the category’s potential: a David Hockney portrait of Betty Freeman sold for $8 million in May, a world record for the artist — and still tipped as a sound investment.

“Whoever bought that work got an absolute total bargain,” said Simon de Pury, chairman of auction house Phillips de Pury & Company, who believes Hockney’s works will follow the pattern set by fellow British painter Francis Bacon, whose prices rocketed after an initial struggle.

Of course, Hockney was born in 1937, which means that technically he doesn’t fall into the “born after 1945″ category, but I’m sure no one really cares about that — the important thing is to buy! Now!

In reality, art — especially contemporary art — is never “a sound investment”. There are some driven collectors who buy it because they can’t help themselves; there are also some very succesful dealers who are extremely good at moving inventory and driving prices upwards. There’s even a tiny number of artists who saw their prices fall, only to then participate in a rebound during the 2000s art boom. But in general, once prices for a given artist start falling, they never recover. And the overwhelming majority of paintings by artists born after 1945 can’t be sold for any sum, let alone anything approaching the initial amount paid for them.

I have a rule of thumb for both paintings and houses: would you buy it at this price today if you knew that you could only ever sell it for $1 in the future? If the answer is yes, then go ahead and buy. If it’s no, then think very hard indeed before buying.

Houses don’t generally go to zero, of course — not outside Detroit, anyway. But the thought experiment is still worth running, because it helps to crystallize the degree to which you’re implicitly speculating on the housing market when you buy a home.

If it’s cheaper to buy than to rent, it doesn’t matter if the value of the house goes to zero — you’re still better off buying. Alternatively, if you love a particular property and very much want to own it, and you’re willing to pay a lot of money to do so, that’s fine too. (That’s the main reason why people should buy art.) But if you’re buying as an investment, in the hope that your property will rise in value, it might be worth taking another look at your risk profile. Maybe you can afford to take that kind of risk. But then again, maybe you can’t.


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