'Art in times of crisis' by Géraldine David, Yuexin Li, Kim Oosterlinck and Luc Renneboog in (2024) Economic History Review comments
We trace the long-term performance of the UK art market across a broad set of crises: world wars, economic recessions, financial crises, inflationary periods, and changes in monetary policy. By means of digitalized historical auction archives, we construct art price indices from the early twentieth century onwards and disclose that annual art auction value grew, in real terms, more than seven-fold over this period. The arithmetic annual real return and risk amount to 3.6 per cent and 20.1 per cent, respectively. Art returns plummeted at the onset of wars, but turned positive in the second half of wars when they outperformed stocks, suggesting that art was seen as a safe haven in times of political turmoil. During wars, smaller – and thus more transportable – paintings obtained higher returns. Art returns are sensitive to economic and financial crises, with the largest slumps occurring during the Great Depression, oil crisis, recessions of the early 1980s and early 1990s, and the Great Recession. We also document changes in art preferences for paintings’ sizes, schools, liquid art, and artists’ nationalities across crises. Art enters a broad optimal asset portfolio both in non-crisis periods and during war times.
The authors state
In January 2021, Sandro Botticelli’s Young Man Holding a Roundel, one of the most significant portraits of any period within art history ever to appear at auction, was hammered at Sotheby’s New York at a record price of USD 80 million (approximately USD 92 million, including the commission). The artwork by the Renaissance painter was being sold by the estate of the late real estate billionaire Sheldon Solow, who had bought the painting at Christie’s London in 1982 for merely GBP 810000 (USD 1.1 million). Prior to its sale, doubts were raised about the willingness of global art collectors to invest in art amid the coronavirus disease 2019 (COVID-19) pandemic and considering the equity market’s high volatility. To stimulate demand from collectors and potential bidders, Sotheby’s spent 4 months on a marketing campaign, displaying the painting around the world. The result was a new auction record for a Botticelli painting. The hammer price was also the highest price paid for an Old Master since Leonardo da Vinci’s Salvator Mundi was sold for USD 450 million in 2017. This example suggests that considerably large returns can be obtained from artwork sales, even in times of crisis (in this case, a global pandemic). Even more surprisingly, Sotheby’s sales for 2021 surpassed USD 7.3 billion, the strongest total in the company’s 277-year history, and its counterpart, Christie’s, achieved similar annual sales of USD7.1 billion for 2021, the auction house’s third-highest total ever.
In this paper, we ask whether art, in general, is a good investment during crises such as wartimes, economic recessions, or financial downturns, after digitalizing historical UK auction archives from the early twentieth century onwards. Despite the growing popularity of art as an alternative asset class, the role of art as a safe haven or an investment in times of crises has rarely been studied over the long term. This is mainly because of the lack of available art market data for long periods. An analysis of art performance in rare disasters is impeded by gaps in data that cause sample-selection problems, especially during the worst crises when data are more likely to be missing. We aim to resolve this limitation by manually collecting historical auction records from various (even handwritten) sources to investigate the long-term performance of art markets and their determinants from the early twentieth century onwards. The microlevel auction datasets enable us to estimate the prices and returns over the long run, including the most difficult periods (e.g. wars), whilst also providing us with cross-sectional details of the art market. We focus on the British art market, primarily based in London, which was a pivot market throughout the greater part of that century and continues to hold significance today. In contrast to art markets of other countries, the UK market maintained its dominance over our entire sample period. Before the Second World War, Paris held significance as a market, particularly for avant-garde movements, however, after the war, the market became much more locally oriented. Subsequently, the US art market, initially localized, began its ascent to become the principal centre for modern art in the 1960s. In comparison, the prominence of the Chinese art market is a relatively recent development, emerging in 2005. The focus on the UK art market guarantees that our analysis is conducted on a market that maintained prominence throughout the entire sample period. This centrality is further reflected by the closely aligned price levels between the UK and US markets in the final quarter of the twentieth century, signifying that the UK market authentically represents the international art market. The century is characterized by numerous crises, from political to economic and financial shocks, each of which may have impacted the risk and returns of the art market or its segments. Our rich datasets enable us to provide a detailed overview of the evolution of the British art market over more than a century, including the pre-war period, the First World War, the interwar period and Great Depression, the Second World War, the Bretton Woods period, and the post-Bretton Woods era. To the best of our knowledge, this study is the first to examine the performance and risk of art markets over a long time series with large cross-sectional detail, focusing on major crises.
The development of the art market per se crucially depended on the emergence of mass demand and the evolution of mechanisms for selling works of art either directly by artists (or their representative galleries) or via intermediaries, such as dealers and auctioneers. During the past centuries, new art movements arose, first selling on the primary market through galleries and, subsequently, as demand grew, through the secondary market, composed of both a private market (through dealers) and a (public) auction market. In the second half of the fifteenth century, primary markets for paintings arose in places such as Bruges and Florence as a derivative of the market for commissioned artwork. As markets emerged in the sixteenth century with non-commissioned artwork on offer, dealers and agents emerged as specialized art professionals in, for instance, Antwerp, which grew to be one of the main European centres of art production. In the seventeenth century, art collecting became a more visible activity, and professional intermediaries, especially dealers, dominated the art market. Regular auctions of paintings were held by the Amsterdam Orphan Chamber in the early decades of the seventeenth century. The first auctions for which there remain printed catalogues with rules were held in London later that century. Whilst the seventeenth century was the era of the dealer, the eighteenth century was the era of the auctioneer.The most reputable auction houses, such as Sotheby’s (London) and Christie’s (London), were founded in 1744 and 1766, respectively. In the closing years of the eighteenth century, two other auction houses were founded in London: Bonham’s in 1793 and Phillips in 1796, and these businesses also survive to the present day.
The art markets of the twentieth century were defined by the two world wars, the triumph of modern and contemporary art, the chase for record prices, and by the end of the century, the rise of the Internet. The growth of modern art markets reflects the culture of societies, but the evolution of art prices also follows the concentration of wealth and economic development. As such, the art market’s evolution has been closely associated with an increasing interest in art as an investment because of its dual nature. It not only yields an ‘aesthetic dividend’ derived from owning these ‘passion’ investments or collectibles, but is also expected to be a store of value and even yield positive real returns. Given the low correlation of alternative investments such as art with traditional financial assets (equities, bonds, commodities), investing in art can expand the efficient portfolio frontier.
To investigate how art prices, returns, and volume evolve in acute crises and intermittent quiet periods, we follow the chronology usually adopted in economic history by distinguishing the following periods: the pre-First World War period (1907–13), the First World War (1914–8), the interwar period and Great Depression(1919–39), the Second World War (1939–45), the Bretton Woods period (1944–73), and the post-Bretton Woods era (1974 onwards), which includes the Great Recession (2008–10). We assess the relationships between the art market on the one hand, and on the other, macroeconomic indicators [e.g.changes in gross domestic product (GDP), national debt, inflation, exchange rates, term structure, and income inequality], financial markets (equity, bond, and treasury bill markets), and other alternative investment markets (e.g.gold and housing). We focus on crises and how art markets react specifically to wartime shocks, financial crises, and systemic troubles. Furthermore, we study the cross-sectional performance of art by price segment, liquidity, size, and artist nationality across crises. Finally, we investigate art’s role as an investment by assessing optimal portfolio allocations where art is included in and excluded from broad asset portfolios for non-crisis periods, economic and financial crises, and war times.
We find that the annual real (geometric) return averages 3.6 per cent (1.6 per cent) and 8.0 per cent (5.8 per cent) in real and nominal terms, respectively, spanning more than a century (and starting from 1908). Except for the initial years of the First World War, returns consistently exceeded inflation. The art returns are highest in the Bretton Woods (1944–73) period, followed by a subsequent downturn. Generally, art demonstrates lower performance than both equities and bonds in terms of Sharpe Ratios. This trend is particularly evident during financial crises and economic recessions(the only exception is the Great Recession, where the art market exhibited greater resilience than the plunging stockmarket). Examining war periods, we find that art returns begin modestly but significantly improve mid-war (when the odds are turning). Subsequently ,they exceed the returns of investment alternatives. During these years, smaller and more portable artworks, as well as the highest-quality art (belonging to the highest price segment), command a premium. Notably, we find no significant relationship between economic cycles and the volume of art works offered in the auction market. Although higher prices may attract more volume, volume does not significantly collapse in recessions. The reason may be that part of the sales may be forced (triggered by the four Ds: disaster, debt, death, and divorce, of which the former two may be correlated with recessions).We also document that art enters an optimal portfolio of investments in equities, bonds, real estates, commodities, and gold in all periods, including the war years, but not in periods of financial and economic crises. The results suggest that art can be a safe haven in political crises (such as wartimes) but not during the financial crises and economic recessions.
The rest of this paper is organized as follows. Section I reviews the literature, section II describes the methodology and data, section III documents the evolution of art prices since the early twentieth century, and section IV reports the empirical results on art returns and crises. Section V concludes.
