Skate reports that Southeby’s signed an amendment with their syndicate of lenders that allows Southeby’s to double their price guaranties for actions from $300 million to $600 million going into the next fine art auction season. In a May 4, 2014 article, the New York Times reported the common wisdom that guarantees are behind the speculative rise of contemporary art prices at auction, but is that really true?
Interestingly, a recent working paper by Kathryn Graddy and Jonathan Hamilton explores the effect of both in-house and third party price guarantees on the fine art market. Graddy and Hamilton conclude that “… for sales of Contemporary and Impressionist Art—the types of art that consistently make headlines—the guarantee itself has no effect on the final price achieved, once the value of the item is taken into account. More valuable items are more likely to be guaranteed, which is consistent with the auction houses using guarantees in order to attract commissions.This is especially the case for outside guarantees.”
In my opinion, the speculative bubble in contemporary art prices have more to do with the very low rates of return on fixed income investments (even into the negative interest rates) meaning, that there is a great deal of cash seeking an investment and investors are looking to contemporary artwork (and collectibles in general) not for their intrinsic value as art, but their potential as financial investments. It also means that when the interest rates go back up, there will be a corresponding decline in the price growth of contemporary art.