How Leveraged Is the Art Market?

Portfolio raises an interesting question: has art financing brought leverage to the art market?

The art boom was fueled in part by easy credit from private banks—and vice versa. Now, as the credit crunch continues to wreak havoc on global commodity and stock markets, many private lenders are pulling back, and art world professionals fear that will put even more pressure on the once-booming market for art.

U.S. and international art collectors borrowed an estimated $2 billion to $3 billion from private banks and other financial-services companies during the past decade, according to Art Capital Group, a New York-based firm that specializes in art finance. The loans are often backed wholly or partially by the art itself with private lenders typically charging modest monthly interest payments. Now, even the wealthiest collectors are finding it difficult to secure lending, experts say.

The usual patter on art-backed loans is that they do two things, provide working capital to dealers and create liquidity for collectors. Portfolio implies that the $2-$3 billion in loans went into further art purchases (the story opens with an anecdote about a collector who was cut off from funding and closes with the same collector sitting out the auction season because of it.) But no where in the story does the writer offer real evidence that the $2-$3 billion was substantially spent on art. Nor do they run the numbers to show how that $2-$3 billion would affect the market.

Remember, that’s $2-3 billion over a decade when the art market grew to an annual size of $50 billion. Conservatively, that would put the decade’s turnover at $150 billion. So the loans would have injected 1.3-2%  more money into the overall market–that is, if the money was used to buy more art.

No Banking on the Art Market (Portfolio)