Is the Art Bubble About to Pop?

If you took the entire secondary art market and ran a repeat-sales regression on those works, the annualized return probably would be below that earned by equities and perhaps higher than fixed income and other asset classes, he maintains.

Beard cites several macro trends driving the top artworks’ prices higher. One is “a secular 20-year trend of [the] opening of new markets, the democratization of massive economies, which has put a lot more liquidity into this market.”

Also, buyers tend to focus on the most influential artists, those whose works have influenced either the broader culture or other artists. When museums buy works like that, he says, those objects essentially disappear from the market and that constrains supply.

It’s basic supply and demand—or Econ 101. “The driver here is the fact that folks who have a lot of disposable income for whatever philosophical reason want to own original works of genius by the master artists of Western and Eastern civilization,” Beard explains. “They want to own that. And, when there’s a limited supply of those in existence, it’s going to drive prices considerably higher.”

Kräussl has researched the market’s price moves and has found that “an important rise in prices of artworks does not necessarily mean that there is an active speculative bubble in the art market.” He has applied statistical analysis designed for bubble detection to almost a million painting auctions from the past 35 years.

His findings? The Impressionist and Modern segment has rebounded since its correction from the 1991 bubble, but it is not yet in new bubble territory.

In contrast, the Postwar and Contemporary market appears to be in “another speculative bubble phase that began to emerge in late-2011,” Kräussl says, describing it as a “mania phase.” (More details on Kräussl’s market analyses are available online.)

What might cause prices to stop marching higher? A shift is likely to be caused by macro events, such as in 1990—when Iraq invaded Kuwait, the world experienced an oil shock, and the Japanese economy experienced a deep recession, he explains.

Those events roiled the art market and caused major buyers to pull back. However, at least for the time being, Deloitte has a positive market outlook for the first half of 2015, which it outlined in its “Art & Finance Report 2014.”