The art market was suddenly made into a market that had speculation being one of the main factors that determined price. Artists popular with speculators would see the price of their paintings increase by a great amount. Another reason why the prices rose all of a sudden was the effect of the galleries. Galleries would often delay the selling of a painting even if the buyer was offering the price the gallery wanted. They would do this because they knew that with the demand in the art market increasing, they would be offered a better price.
“From our experience of art exhibitions being 'sold out' at the preview itself, we have learnt that even if you have the money, you may not acquire the painting you desire. In fact, some dealers are guilty of holding on to works of artists they are promoting - only to sell them when prices skyrocket. "Gallery dealers, both existing and new corporate entrants, will face the same overriding problem of sourcing," agrees Kapoor. "For fresh entrants coming in with a core collection of the last several years, replacing stock becomes difficult. This might lead to a price escalation if they purchase at higher prices from the secondary (auction) market and then mark up sale prices”
As seen above, galleries were facing higher costs since paintings were increasing in price and so their prices too increased.
The art market has two types of artists: the contemporary artists and the master artists. The contemporary artists are the ones who have been in the market for maybe two to three years and so are relatively new to the market. Master artists are those who have been painting for a very long time like 20 years or more. This essay will show how the two different types of artists have been affected differently by the slowdown.
Demand For Paintings Of Both Types Of Artists:
Analysis of my data showed that the number of paintings sold had decreased from 1834 to 679. The bar graph shoes the effect. The red shows how many paintings were sold while the blue shows how many paintings were displayed in the galleries.
The number of paintings displayed has decreased by 63%. It may look like this happened because the number of paintings displayed decreased, but this is not the case. In fact, the number of paintings displayed decreased because of the decrease in the number of paintings sold. We see that the paintings sold to paintings displayed ratio changed from 0.52 to 0.34. Due to the big drop in demand, galleries did not want to keep paintings that would not sell. They would lead to costs for storage and care of the paintings that would not sell. Revenue from sales was low and so the costs had to be minimized. Therefore galleries reduced the quantity of displayed paintings. The galleries that filled in my questionnaires reduced the total number of paintings displayed from 3548 to 2015.
A painting is not the type of good that is bought everyday. It is bought by an individual when that individual has extra money to spend and is genuinely interested in the painting. With the slowdown, people received less income than they were expecting. Therefore they did not want to purchase a good that they would have no use for. If a collector feels that he has less money than he expected to have, he will not purchase a painting that he truly appreciates as he has less money than to spend than he thought he would have.
The demand for paintings by speculators has also reduced greatly. This is because people who would speculate in paintings would do so only because they felt that the price was going to increase. The speculators realized that with the economic slowdown setting in, the demand for paintings would reduce and thus price would drop too. Thus they decided that paintings would not be a worthwhile investment anymore, as the drop in demand would mean a drop in the price. Speculators do not only speculate on paintings, therefore when they saw the drop in price of paintings, they stopped speculation in the art market and moved to speculating on other things where they would get a better return. This reduced the demand for paintings even further. Thus there was a greater drop in the price. Thus we can see that the drop in demand for genuine collectors led to the reduced demand for paintings from speculators.
In the space of two months (September- October 2008) the prices of paintings fell by more than 30%. A gallery owner who took part in the data collection told me that in the months of November and December 2008, 90% of the paintings that were displayed in their gallery did not sell.
“Demand for Indian art at auction has slumped as the country’s economy has been battered by the global financial crisis. India’s average auction prices for modern works have fallen 31.5 percent to $54,385 since March 2008, ArtTactic said. The average price of contemporary Indian art has dropped 72.7 percent to $13,827.”
Effect On Master Artists:
The tables below show the summation of the sale of paintings by master artists in the two time periods. (Taking $1 = Rs 45)
The demand for paintings of master artists dropped by more than 50% in the two time periods. Artwork of master artists has never been favored by speculators because of the high price of their paintings. Since the initial investment required to buy the paintings of a master artists was too high, speculators never wanted to speculate on the prices of master artists as the risk outweighed the benefit. Also, according to a gallery owner, the prices of the master artists were relatively stable due to relatively low demand so speculating in master artists is not advisable as their prices would not rise as much as the newer artists in a short period of time. According the data I collected speculators could only expect around a 5% rate of return on their investments on a painting of a master artist. Speculators felt that the rate of return was too low and so they chose to stay away from master artists. Therefore the pull out of the speculators did not affect the demand for master artists as they did to contemporary artists. The data collected from the galleries showed that number of paintings of master artists bought by speculators fell from 162 to 41. Genuine collectors on the other hand bought 195 paintings between October 2008 and June 2009 while they bought 414 between January and October 2008. Thus we can clearly see that the drop in demand from speculators would not have affected the market for master artists as much as the drop in demand from genuine collectors.
The table above shows that even during the boom time of the art market only a little less than half of all the paintings of master artists were sold. Therefore the quantity demanded for master artists was low even at first. Very few people can afford to buy a painting made by a master artist and thus very few paintings are sold even when there is a boom phase in the business cycle. Due to the slowdown, the collectors were reluctant to spend a large amount of money on a painting, as they have no use for it. Instead of spending the money on a painting, the collector would rather save it for harder times. Thus the demand for paintings of master artists is price elastic. It is not a good that needs to be purchased. One can wait for the price to change before he purchases the good.
The effect of the slowdown on the market for paintings of master artists can be seen in the diagram below. The diagram shows how the demand for paintings of master artists has reduced.
Note: The elasticity of both the demand curves has not been calculated. The demand curves were approximated using the data collected.
The diagram clearly shows how the demand curve in the market has moved to the left from the purple line to the red line due to the economic slowdown as explained above.
Effect On Contemporary Artists:
Contemporary artists are artists who have been in the market for sometime but not so long that they are master artists. The collated data for these artists is shown below:
From the tables we can see that there has been around a 65% drop in the number of paintings sold. The main reason is the reduced number of speculators in the market. Speculators pursued artworks of contemporary artists since these artists were new in the market and once they became popular, demand for their paintings would increase and so would price When this happened, speculators would sell off the paintings they had bought earlier, making a profit on their investment. According to a gallery owner, the genuine art collectors were slowly leaving the market and their numbers were slowly decreasing because the aggressive speculation of the prices was driving the prices upwards till it was too high. Thus the genuine collectors were leaving the market, as they were not willing to pay the price for the paintings. The economic slowdown accelerated this situation. When the speculators noticed this they reduced their investments. They did not want to invest in something that would not give them good returns. Thus they left the market to pursue more profitable investments than art.
“Confidence levels in the once-booming market for Indian art have dropped 63 percent since October as prices slide, reports.
A new report published by London-based research company ArtTactic shows its confidence index for Indian contemporary art alone declined even more, by 90 percent, during the same period.”
This led to a massive decrease in the demand for contemporary artists, which led to the prices falling. A look at the data collected shows to what extent the speculators have left the market.
Earlier the speculators bought 70% of all the paintings that were sold but now after the slowdown they have only bought only 40% of all paintings. This clearly shows how they have reduced their demand for paintings since October 2008. This proves that the art funds have reduced the amount of money that they are willing to invest in contemporary art. In fact, they have only started investing in art again. The manager of one of the galleries that filled in my questionnaire stated that between the periods of November 2008 and January 2009 very few speculators actually bought paintings. But since demand was low galleries were forced to reduce their prices so that they could try to increase the quantity demanded. This tempted some more speculators to invest in the paintings and re-enter the market. Thus from the data of the last few months that speculators are re-entering there are slight signs for a recovery in the art market.
“The art market is showing signs of recovery, which was only expected. There are already clear indications of this happening. Recent auctions point to a sense of revival in the art market.
A series of auctions held in the last few months indicate a perceptible positive change in the scenario. The mood is definitely upbeat. The satisfactory sales numbers suggest a demand for quality works.”
Art collectors had earlier reduced their demand for paintings of contemporary artists, as they were not willing to pay the high price of paintings of contemporary artists since they felt that the paintings were not worth that much. The demand for paintings is not the same as normal goods like electronics or clothes. Genuine art collectors buy a specific painting if they truly appreciate it. The price of a painting may not have been a major factor that influenced their decision to buy a painting before the speculators entered the market but after the rampant speculation had artificially increased the price, art collectors realized that the price of the paintings had become too high and so they reduced the quantity demanded for the paintings. We can see that their demand was low from the data collected. We see that the genuine art collectors only accounted for 30% of all the paintings sold between January and October 2008. From this we can see that up to an extent, price will not be a major factor for the demand for paintings by collectors but once the prices go up past an extent the quantity demanded will decrease to a greater extent than it did earlier. This is further strengthened by the data I collected. The data clearly shows that the number of paintings sold to art collectors has not decreased as much as the decrease in the number of paintings to speculators. Since speculators pulled out of the market, the demand for paintings of contemporary artists decreased greatly as they formed a major part of the market. This led to a decrease in the price of the paintings. With the drop in price genuine art collectors gradually entered the market again. They have a greater share in the market now as compared to speculators. At the recent art summit an art gallery owner was quoted saying:
"Prices are down by 30% and that's a good thing. It has driven speculators out of the market and made art more accessible to people,'' says Shireen Gandhy of Mumbai's Chemould which deals in contemporary art.
Thought the genuine collectors have a greater share in the market between October 2008 and June 2009, their quantity demanded has still decreased. This is because they are feeling the effects of the economic slowdown also. We can see that the demand for paintings decreased from 381 paintings to 267 paintings in the two time periods. With the slowdown, people are hesitant to spend money and so even with the price decrease due to the pulling out of speculators, the quantity demanded from collectors has decreased as the collectors too do not want to spend money on a good that will not provide no actual use to them but as an object for appreciation.
Economic Theories in the Essay:
Different quantities of a good are demanded at different prices. An increase in the price of a good will decrease the quantity demanded of the good. This is because of the income and substitution effect. The income effect states that when the price of a good increases, people will feel poorer as they have to spend more money for the same good. Therefore they will reduce their demand for the good. The substitution effect states that if the price of a good increases, people will purchase more of a substitute of that good and so the quantity demanded of the good will decrease. Paintings have very few substitutes and so the substitution effect is minimized. But since a large portion of ones income is spent on a painting, the income effect will have a large effect on the quantity demanded of a painting
Price elasticity of demand is defined as the responsiveness of the quantity demanded of a good to a change in its price. If the absolute value of the elasticity of a good is greater than 1, then the good is price elastic. Price elasticity of a good depends on various factors: substitutes of the goods, percentage of income and necessity. People can put off the purchase of a painting till it becomes cheaper as it is not a necessity. Also a large percentage of ones income is spent on a painting. Therefore a higher price will deter people from buying the painting Therefore it can be called a price elastic good.
Conclusion and Limitations:
The research for the essay and the analysis of the data collected shows that the art market has in fact experienced a fall in demand for paintings of both types of artists. The data I collected showed that the demand for master artists fell by approximately 59% while the demand for the contemporary artists fell by 64%.
It was observed that the fall in demand for contemporary artists was because the number of paintings bought by speculators decreased from 877 to 176. This is a fall of 80%, which is very significant. We saw that the investors left because they felt that due to the slowdown, people would decrease their demand for art. Thus the price fell because of the massively reduced demand from the speculators. It was also observed that because of the drop in prices, the demand from collectors was not as much as was expected. In fact the drop in demand from collectors for contemporary artists was 30%. A gallery owner had been quoted as saying that because speculators had left the market, collectors had started coming back (page 10). Therefore the drop in demand from genuine collectors was not that great as the art funds though they would be. Therefore there are signs that there may be a recovery in the market for contemporary artists since the demand from collectors is still present. The slowdown accelerated the effect the speculators had on the contemporary market.
The market for master artists was a different story from contemporary artists. The total fall in demand was 59%. The reason for the drop in demand for master artists was that the genuine collectors did not want to spend money on the paintings. The cost of the painting outweighed the benefit they would get out of the appreciation of the painting. Since the economy was in a slowdown, people were more careful where they spent their money. Recovery of the market for master artists will take time. It can only happen when people are more confident of the economy and there are signs that the slowdown is going to stop. Therefore the slowdown was the main reason for the drop in demand for master artists.
Although the data analyzed showed the appropriate response of the market to the economic slowdown, the data I collected had some limitations.
I went to 10 galleries that were located in South Mumbai. There are around 25 art galleries in South Bombay therefore it is an appropriate cross section of the art galleries. But the first gallery owner who filled put me in touch with all the galleries out my questionnaire. But since one person referred all the galleries to me, they may have all had similar factors affecting them. It could be that other galleries had different factors affecting them. I should have gone to other galleries instead of relying on one person to help me contact galleries.
Another thing that I should have done was to get the sales figures for each month between January 2008 and June 2009 instead of dividing it into two 9-month periods. This would help me analyze the data further as it would tell me how exactly the speculators and collectors changed their demand and whether there were signs of a recovery of the market. The only evidence I had for the signs of a recovery was a few gallery owners telling me that the genuine collectors have started coming back into the market for contemporary art.
Also I should have made a questionnaire for collectors and speculators to help me calculate the price elasticity of the paintings of the two types of artists.
Appendix:
What returns could investors expect on their investment on contemporary artists between January and October 2008?
a. 0-5%
b. 5-10%
c. 10-15%
d. 15% +
What returns could investors expect on their investment on contemporary artists between October 2008 and June 2009?
a. 0-5%
b. 5-10%
c. 10-15%
d. 15% +
What returns could investors expect on their investment on master artists between January and October 2008?
a. 0-5%
b. 5-10%
c. 10-15%
d. 15% +
What returns could investors expect on their investment on master artists between October 2008 and June 2009?
a. 0-5%
b. 5-10%
c. 10-15%
d. 15% +
Bibliography:
1.
Posted on June 4, 2007 by artforprofits
Accessed on 3rd September 2009
2. Indian Art Market Confidence Plunges, Report Says
Published: May 7, 2009
Accessed on 23rd June 2009
3. ‘Recession good for art buyers, bad for artists’ Posted: March 24th, 2009
Accessed on 23rd June 2009
4.Recession-hit paintings lose colour Posted: May 8th, 2009 By: Sushil Parekh
http://blog.taragana.com/n/recession-hit-paintings-lose-colour-55017/
Accessed on 17th July 2009
5. Sales buoy mood at art summit
Posted by: Neelam Raaj
http://indianartnews01.blogspot.com/
Accessed on 1st September 2009
6. . Art In The Times Of Recession
DNA After hrs 18th June 2009
7.Moderns give Indian Art a Leg Up
Times Of India 18th June 2009
8. Economics in terms of The Good The Bad And The Economist
by Matt McGee. Published by IBID Press, Victoria 2004.
9. Artsville Bound by Maria Louis
Acessed: October 3rd 2009
10. Indian Art Market Confidence Plunges, Report Says
http://www.artinfo.com/news/story/31346/indian-art-market-confidence-plunges-report-says/
Accessed: September 7, 2009
Output
Accessed on 3rd September 2009
Artsville Bound by Maria Louis
http://www.verveonline.com/42/life/artsvillefull.shtml
Indian Art Market Confidence Plunges, Report Says
http://www.artinfo.com/news/story/31346/indian-art-market-confidence-plunges-report-says/
Published: May 7, 2009
Indian Art Market Confidence Plunges, Report Says
http://www.artinfo.com/news/story/31346/indian-art-market-confidence-plunges-report-says/
Published: May 7, 2009
Art market is on a recovery path
31st August 2009
http://artexpoindia.blogspot.com/2009/08/art-market-is-on-recovery-path.html
http://indianartnews01.blogspot.com/
Source:
