Articles

Valuing Art

Lecture by Jane Kallir [May 2007]

As a result of the exponential growth of the art market in recent years, many more people own art today than was the case a quarter century ago. This radically expanding but often volatile market can make it difficult to accurately value art, whether for estate or for income tax purposes, or as part of a collector’s investment portfolio. So I thought it might be helpful to place the current art market in historical context.

 

I’m going to start with a little personal history. Collecting literally saved my family’s life. My grandfather, Otto Kallir, was Jewish, and he ran the leading gallery for modern art, the Neue Galerie, in Vienna before World War II. Now if the name Neue Galerie sounds familiar to you, it’s because that’s the name of Ronald Lauder’s museum for Austrian and German art--a name Lauder chose as a tribute to my grandfather’s role in introducing that art to the United States.

 

My grandfather was the rare sort of collector whose instinct for quality applied to many areas: not just to fine art, but to musical manuscripts and historical documents as well. Among his several collections was one related to the early history of aviation--started when he was just a boy, around the time the Wright Brothers made their historic flight at Kitty Hawk. Otto Kallir, who had a keen sense of history, watched neighboring Germany with a wary eye after Hitler came to power in 1933. Knowing that it might be just a matter of time before Hitler advanced to Austria, my grandfather sold his aeronautical collection in Switzerland in 1935. When Hitler annexed Austria in 1938, Kallir had money abroad, and he was able to get my family out with sufficient funds to eventually start life anew in the US. So, that is how collecting saved our lives.

 

But there is a second lesson to be learned from this Holocaust story. Art is a relatively illiquid asset. In 1939, when my family arrived in New York, the United States had not yet fully recovered from the Great Depression, and World War II had just broken out in Europe. At times like that, few people have the money to buy art, and their priorities are, in any case, elsewhere. My grandfather’s brother, also a collector, worried that the people might never recover their appreciation for art and culture. “The world has been too unbelievably shaken,” he wrote. “I think it is possible that only my children will get any use from my collection.”

 

The money from the sale of his aeronautical collection was not sufficient to sustain Otto Kallir and my family for any length of time. Almost immediately after arriving in N.Y., my grandfather had established the Galerie St. Etienne on West 57th Street. But making a living selling art was not easy, and not only because of the economic and political situation. My grandfather had almost no connections in the American art world, and he barely spoke English. Furthermore, most of the artists whom he had represented in Austria—masters such as Gustav Klimt, Egon Schiele and Oskar Kokoschka—were completely unknown in the US and had no international market.

 

In 1941, my grandfather mounted Egon Schiele’s first American one-man show at the Galerie St. Etienne. He sold exactly one work: a small oil painting, for $250, which the purchaser paid off in $13 installments over an 18-month period. Schiele watercolors at this time sold for $60, drawings without color, $20. In 1944, a refugee dealer bought 12 Schieles for $270. That was a big deal.

 

Now, let’s fast-forward to 2006. London, June 20: Schiele’s painting Autumn Sun brings over 21 million dollars at auction. New York, November 8: Schiele’s watercolor Kneeling Semi-Nude, Bending to the Left brings over 11 million dollars. Partly because Schiele emerged from total obscurity in the 1940s, he has experienced one of the most dramatic price increases of any artist in the last sixty years. I think my grandfather deserves a good deal of credit for this, for sticking with the artist for decades, when it was not profitable, and for gradually, painstakingly, introducing him to American collectors, critics and museum curators. But in addition to receiving well-deserved recognition over the course of time, Schiele also benefited from the same forces that have caused the work of many artists to appreciate significantly since the mid 20th century.

 

A number of economic factors have contributed to the rapid appreciation of art over the last decades. First of all, contrary to the fears expressed by my grandfather’s brother, the world economy recovered relatively rapidly after World War II, and people did again become interested in art. Still, when I began to work at the Galerie St. Etienne in the mid 1970s, the art world was a far, far smaller place than it is today. There were a number of dealers who, like my grandfather, had been forced to flee Europe and who had brought with them an expertise in various European artists, but the American art scene was based in New York and it didn’t have a very broad international perspective or reach. There were relatively few dealers, compared to today, and far, far fewer collectors. I have always felt that a fairly small percentage of the population seems to have a passionate, intrinsic need to accumulate objects—which could be anything from fountain pens to Impressionist paintings, depending on one’s tastes and one’s pocket book. In the 1970s, the art market was almost exclusively the domain of such passionate, driven individuals. It was, as I said, small.

 

The expansion of the art market began with the inflation of the 1970s. Now, of course, in any inflationary period, the prices of all material goods go up. But in my experience, art tends to respond rather slowly to broad-based economic trends, and art prices didn’t really begin adjusting to the inflation of the 1970s until the 1980s. When they did, the jump in values was often extreme, as the art market had to catch up quickly to inflationary pressures that had worked their way through other asset classes over the course of a decade. The art market’s delayed response to the prior decade’s inflation created the appearance of windfall profits, and encouraged people to start looking at art as an investment. The boom market of the 1980s was launched.

 

Another key event, also dating to the early 1980s, that furthered the expansion of the art market was the gradual transformation of the big auction houses, Sotheby’s and Christie’s, from wholesale to retail sales outlets. Alfred Taubman, the shopping center magnate who bought Sotheby’s in 1983, is generally credited with shifting the focus of the auction houses away from the dealers that were their traditional client base, and instead targeting private collectors. Sotheby’s and Christies, large international corporations, for the first time applied mass-marketing techniques to a field that had previously been the sole purview of small, mom-and-pop style dealerships. Dealers will tell you that auctions are far less transparent than they are cracked up to be, and I will return to this issue in a few minutes. But the public nature of auctions did create a sense of security and stability in the price structure established at these sales. The public nature, and the scope and scale of auctions, also made them easier to publicize than transactions conducted behind a dealer’s closed doors. Increasingly, the price of art became of more interest to people than its aesthetic merits, and watching collectors spend large sums at auction became a glamorous spectator sport. Finally, because they were international enterprises, Sotheby’s and Christie’s were in a better position than individual dealers to cultivate an international class of collectors, to globalize the art market. All of these various outreach efforts expanded the art market beyond the inherently limited core of passionate collectors who had formerly been its mainstay.

 

Now, it’s interesting to look at what happened to the art market after the stock market crash of 1987, not because it’s necessarily predictive of the course matters may take in the future, but because the events of that period give us insight into the nature of the market. The art market actually reached its greatest heights following the 1987 stock market crash. When stock prices are stagnant or declining, some investors will take their money out of stocks and buy art. This same phenomenon, exacerbated by historically low interest rates, has fueled the rapid rise in art prices over the past five or six years.

 

However, it’s also important to remember that the art market crash in the early 1990s followed the bursting of the real estate bubble. While I can’t predict whether a similar decline in the art market will follow the present softening of housing sales, there are certain things that the art and real estate markets have in common. In both markets, when prices start to head south, sellers tend to dig in their heels. The refusal to adjust asking prices to declining demand can, for a while, sustain a false sense of buoyancy in the market, but when reality hits, it tends to hit hard. Downturns can last a long time. Even as the overall economy began to recover in the early 1990s, the art market remained flat until the second half of the decade. As I said earlier, art can be painfully ill-liquid.

 

There are a couple of key differences between the present art market boom and the boom of the 1980s. For one thing, the present market is more selective. In the 1980s, a rising tide lifted all boats—just about every type of art increased in value. Consequently, when the market burst, blame was placed on the fact that ignorant collector-investors had indiscriminately bid up the value of inferior works. In particular, blame was placed on the Japanese, who had made especially bold forays into the field of Western art with little background or connoisseurship. The art-market crash of the early 1990s was, as a result, partly attributed to the spectacular bursting of the Japanese economic bubble. Today, people like to point out, the art market is far more effectively globalized. No one nation dominates collecting activity. There are huge pockets of new wealth in the Far East, India, Russia and Latin America. And the auction houses are no longer the only international players. Art fairs have arguably been even more successful in responding to globalization—bringing together dealers from all over the world, and also serving as travel destinations for international collectors.

 

So, it is said, a more international, more selective art market is immune from the weaknesses that precipitated the crash of the early ‘90s. And that’s probably true. We won’t see an exact replay of the early 90s, but there are other problems to look out for. I don’t think any of us can foresee what increasing globalization may do to the art market—how it may skew the balance of power within the art world, or make the market vulnerable to economic forces in far-off lands. At the moment, selectivity is, for me, a matter of more immediate concern. While selectivity is certainly a good thing when it is motivated by genuine connoisseurship, it can be dangerous when the standards in play have more to do with passing trends and status seeking. Today’s international collectors increasingly seem to congregate around the same few artists, the same few artworks. The prices of certain items, as a result, get driven to irrational heights, while huge segments of the market get left behind. At auction, collectors may converge on one lot by a given artist, and for inscrutable, irrational reasons, ignore a second, equally good lot by the same artist. How, then, does one determine the true value of the artist’s work?

 

Appraisals are based on comparables. But what do you do when comparables don’t provide logically consistent values?