The art market bull run was epitomized by the two-day auction of 56 works by conceptual artist Damien Hirst at Sotheby’s in London on September 15, 2008, the same day Lehman Brothers filed for bankruptcy in New York. As the financial system began its collapse, the sale, titled “Beautiful Inside My Head Forever,” fetched more than £111 million ($198 million), a record for a single artist at auction.
After the financial collapse unfolded on Wall Street and around the world, the Federal Reserve warned of recession in the United States while the Organization for Economic Cooperation and Development (OECD) predicted that Great Britain may face a ten percent fall in houses prices and 200,000 job losses. As the credit crunch spread from banks to hedge funds to the real estate market to the streets, auction houses, which relied heavily on guarantees during the art boom, feared that the usually optimistic climate in the art market would take a turn for the worst.
When confidence fell, auction houses suffered losses for the first time in years that were discouraging but not crippling. The decline of the art boom lagged behind the decline of the equity market and indicated latency between the art market and the economy. The art market sustained throughout most of 2008. In 2008, however, buyer confidence in the contemporary art market dropped 40 percent from the market boom in 2006. In May 2008, one-third of works that were auctioned at post-war and contemporary art evening sales were just at or below their estimated prices. The successful sales of several high-profile paintings, many that broke records, masked the falling business of mid-range artworks. Matthew Rutenberg, an art historian, said, “Bids for the superstructure of the art market are still high, but the foundation is weakening.”
On May 9, 2008, Sotheby’s announced a first quarter net loss of $12.4 million because of “lower commission margins, higher expenses and fewer lucrative single-owner sales.” In the fourth quarter, Sotheby’s reported a 52 percent fall in revenue and a 40 percent decline in auction sales. At the end of 2008, Christie’s chief executive Edward Dolman said that the company is “predicting dramatically reduced sales volumes. We’ve seen confidence dwindle away. People are not certain where prices are. Buyers all round are being very circumspect.” The art boom finally reached a halting point.
In the face of the credit crunch and lower prices, Sotheby’s and Christie’s became risk-averse and more stringent about offering guarantees that made them incur losses for lots that failed to sell. To combat the fall in confidence, Christie’s and Sotheby’s vamped up marketing in order to win coveted consignments and attract buyers to their smaller inventories. In one instance, Sotheby’s placed its catalogs in every room of the Brown’s Hotel in London during the Russian Economic Forum. In those two years after the global financial crisis, auctioneers expected and experienced a market correction back to pre-boom prices instead of a crash.
In 2011, the market had bounced back. Even as the debt crisis unfurled in Europe, global annual revenue of art reached $11.57 billion, $2 billion higher than 2010. Over 1,675 artworks sold for above $1 million and 59 works sold for above $10 million. This data represents a 32 percent increase of 7-figure and 8-figure sales from 2010. In this way, the art market stagnated but did not crash. The main difference between 2008 and 1989 was the consistency of demand for modern and contemporary art. Author Don Thompson believes that the number of collectors and potential buyers during the 2008 crisis was probably 20 times larger than it was during the 1989 crash.
Instead of turning away from art during the economic crisis, art investors—a group of hedge fund and private-equity managers, entrepreneurs, and venture capitalists—focused on the most stable signatures at the high-end of the market. There is a ratchet effect on contemporary art that continuously increases price when supply is limited. As a result of the ratchet effect, author Don Thompson says, “It will take a sharp drop in both financial and commodity markets worldwide to deter those who pursue property, luxury goods, and contemporary art.” Furthermore, as wealth spread internationally and the art market became more globalized, demand increased.
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