Christophe Spaenjers assesses the relationship between artwork prices and macroeconomic volatility

Christophe Spaenjers

Art investing in times of inflation

Art collecting has always carried the promise of both pleasure and profit. In this year’s <a href="https://theartmarket.artbasel.com/" target="_blank">Art Basel and UBS&nbsp;Survey of Global Collecting</a>, close to 30% of high-net-worth collectors indicated that financial investment has been their prime motivation for purchasing art. But even those who mainly buy for non-financial reasons are likely to care about the cost of buying art—and about the potential resale or inheritance value of their collection.
Motivated by the recent spike in both inflation and interest rates, the question arises of how such macro developments may affect price levels in the art market. In evaluating the existing evidence on the investment characteristics of art, it is also important to consider an assessment of the strengths and limitations of the reliance on aggregate price indices.

Inflation, interest rates, and art prices.
The record levels of inflation that we have been witnessing over the last two years have led to a renewed interest in the question of whether art investments can provide a hedge against consumer price increases. Do art collections appreciate as the cost-of-living increases? In earlier research, I have examined the historical correlations between inflation and the returns on different real asset classes. 1 The results suggested that artworks are a better way to preserve purchasing power than financial instruments like bonds, for which cash flows are fixed in nominal terms. At the same time, art has delivered less protection on average against inflation than some other collecting categories. Diamonds and stamps, in particular, are easier to acquire and store, and are more substitutable, than artworks. (One could think of them as being more ‘gold-like’ than art.) However, this also implies that they can lose a lot of value once the inflationary pressure subsides. Moreover, the price patterns of all collectible categories exhibit high levels of volatility—just like gold—reducing their appeal as hedging devices.

Recently also, interest rates have spiked up, as monetary policy has reacted to the high level of inflation in the economy. It will be interesting to see how this is going to affect art-backed borrowing and the use of credit to finance new art acquisitions. Both (non-mutually exclusive) types of behavior are relatively common among HNW collectors according to the survey. More than 40% of respondents reported using credit or loaned funds to purchase works of art at some stage while building their collections, including 30% having done so in 2022 or 2023. Secured loans with specialist lenders using art as collateral are a relatively popular financing strategy. Notably, 46% of this year’s respondents have experience with using their art as collateral, with 18% even using this for liquidity needs rather than to finance new acquisitions.
As for the effect of increasing interest rates on art prices, it is unclear what to expect. Only a small minority of respondents (12%) stated that fluctuations in interest rates had negatively affected their decision to purchase art in 2022 and 2023. Maybe this just highlights that, while nominal interest rates are sometimes more salient than real rates, it is the latter that are more relevant in this context. Namely, higher real interest rates imply a higher opportunity cost of holding art: keeping money invested in art means foregoing a higher inflation-adjusted return on one’s savings. Therefore, art prices may drop when real rates go up—but, today, the high level of inflation means that real rates are still low despite high nominal rates. Hence, it is not obvious that we should anticipate the current interest rate environment to have any discernible effect (independent from that of inflation) on art price levels. Moreover, the relatively low real interest rates in recent years are part of a longer-run secular decline, and the resulting absence of substantial movements in real rates complicates an empirical assessment of their relationship with art prices.

To index or not to index?
The above discussion makes clear that, when it is unclear in which direction the art market is heading, it can be appealing to look at the impact of macroeconomic variables on the art market historically. Such assessments typically rely on the observed correlations of inflation, interest rates, income, or any other indicator of interest with aggregate art price indices estimated based on auction transactions. Next to illuminating the relation between the wider economy and the art market, such indices are useful to measure long-run price trends, and to understand historical cycles in the market. However, it is important for collectors and other market observers to appreciate that the performance of individual collections can deviate substantially from that of aggregate price indices—especially for smaller art portfolios.
To investigate this topic in detail, research I conducted with colleagues from Cambridge University analyzed the artworks acquired by the economist John Maynard Keynes and bequeathed to King’s College in Cambridge upon his death—a collection of over a hundred pieces by both modern masters (for example, <a href="https://www.artbasel.com/catalog/artist/9455/Georges-Braque" target="_blank">Braque</a>, <a href="https://www.artbasel.com/catalog/artist/13803/Paul-C%C3%A9zanne" target="_blank">Cézanne</a>, <a href="https://www.artbasel.com/catalog/artist/6742/Henri-Matisse" target="_blank">Matisse</a>) and friends and acquaintances of Keynes (for example, Duncan Grant, Vanessa Bell).2
After identifying a number of different historical valuations of the collection and procuring our own expert appraisals of contemporary market values, we found that the collection has appreciated at a rate rivaling that of equities since acquisition. This is a much better performance than that shown by standard art price indices. Clearly, this means that other art investor-collectors must have underperformed the market over the same time period.

Why is there so much variation in the financial performance of art collection around average market movements? Our study highlighted a number of different reasons. First, there is the existence of transaction-specific price risk, which economists might call ‘noise’. Namely, prices depend in an unpredictable fashion on the liquidity or thickness of the market—and the valuations of the potential buyers—at the time and place of transaction. This idiosyncratic component of art prices also explains why auction results can deviate substantially from pre-sale estimates—and why even appraisals (as estimates of expected market values) show a lot of heterogeneity. The upshot is that art collectors can be lucky or unlucky when they are buying and selling. In turn, this leads to random variation in realized returns that comes on top of systematic heterogeneity in price trends caused by changes in the relative popularity of artists or art movements.
Second, we show that artwork returns exhibit substantial ‘skewness’, meaning that many artworks appreciate at a moderate rate, but a very small fraction realize extremely high returns. This is not unlike what can be observed in the market for venture capital (and, to some extent, stocks). Small art collections will have a higher probability of missing out on the winning ‘lottery tickets’. At the same time, it might be collectors’ taste for long-shot investments that pushes up art prices across the board, again not too different from VC. Third, an important factor to consider is that most art collections are very concentrated. It is not uncommon for fewer than 10% of the works in a collection to account for more than three-quarters of its total value. This concentration amplifies the importance of investment-specific risk factors and artist-level price trends. Fourth, and finally, there exist systematic differences between art buyers in the investment returns that they realize. Tastes, information sets, and investment goals differ substantially between collectors. Some are happy to pay high prices for the art that they love—and to keep it for a long time, maybe even forever. Profit driven buyers take a different approach and will look for bargains in the market. Given the illiquidity of the market and the heterogeneity of artworks, better-informed investors will have access to more—and more profitable—investment opportunities. In this respect, it is interesting that, in the survey, financially-motivated collectors are more likely than other groups to report that they ‘spend a significant amount of time researching’ and that they are ‘only interested in the one specific work’ they are hoping to buy. For all these reasons, art price indices will not accurately capture the investment experience of most buyers. The combination of concentrated portfolios and artwork-specific (and artist-level) return elements implies that portfolios will exhibit a lot of variation in performance around the returns of aggregate indices. Moreover, the lottery-like feature of art investing drives a wedge between market returns and the experience of the ‘median’ art investor.

Times like these
Economic uncertainty has always driven people to invest in real assets. Indices can provide some useful guidance on the average relation between the macroeconomy and art prices based on historical data. At the same time, however, it is important to understand the limitations of any art price index. Unlike most of their financial market counterparts, art indices are not investable. They may moreover fail to capture most investors’ experiences and to fully illuminate the riskiness of art investing. This is particularly important to keep in mind against the backdrop of the ever increasing financialization of the art market, 3 in which investment products are often marketed with references to market-wide return estimates.
<hr>
Christophe Spaenjers is an Associate Professor of Finance at the University of Colorado, Boulder.
Published on November 14, 2023. 
This essay was first published in the Art Basel and UBS Global Survey of Global Collecting in 2023. Download it&nbsp;<a href="https://theartmarket.artbasel.com/" target="_blank">here</a>.
Caption for full-bleed image:&nbsp;Detail of an artwork presented by Anton Kern Gallery at Paris+ par Art Basel 2023.
1. Spaenjers, C. (2016) ‘The Long-Term Returns to Durable Assets’, in Financial Market History (eds. David Chambers and Elroy Dimson), CFA Research Institute Foundation.
2. Chambers, D., Dimson, E., and Spaenjers, C. (2020) `Art as an asset: Evidence from Keynes the collector’, Review of Asset Pricing Studies 10, 490-520.
3. Coslor, E. and Spaenjers, C. (2016) ‘Organizational and epistemic change: The growth of the art investment field’, Accounting, Organizations and Society 55, 48—62.

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Christophe Spaenjers assesses the relationship between artwork prices and macroeconomic volatility

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