It is a question of a great importance, how lucrative are art investments? As this kind of investment becomes more and more popular, independent academic researchers tend to compare art returns with returns of the other assets. In most of the academic studies it is assumed that the price of art is a suitable proxy for its true value, of course after adjusting and including biases.
Most of the academics (e.g. Ashenfelter, Graddy, Gérard-Varet, Pesando, Worthington), focus on price determinants, which influence the returns. The rational price is established based on the physical properties: size, material, themes, condition, and authenticity. The second group of the price determinants includes the artist’s reputation, oeuvre and merit, genre, aesthetic features. They are followed by the external influences, such as place, time, conditions of sale, sales channel, taxation, rates of return of the other assets. Last but not least, the taste and preferences have an impact on prices, especially in long run.
The first research on the return of the art investments was conducted by Anderson (1974), Stein (1977) and Baumol (1986) and based on their fundamentals, more investigations were made, which are summarized in the table, including author(s) of the research, sample, time period, method, nominal and real returns. The most common methods of calculating the returns, which have been used in these studies, are the repeated sales regression and the hedonic regression. The first one compares changes in prices of the same painting over time. The second one decomposes the painting into essential components and then estimates a contribution of each characteristic to the final value of painting. It is worth to mention that the hedonic regression covers bigger sample, thus can be more representative.
The literature is very contradictory and no unequivocal answer on a profitability of the art can be given. Some researchers state that the shorter the period of the research the higher the mean return. Therefore, in long run, the art investment is not so lucrative because it underperforms the other asset classes. But obviously, there are short periods, when the art can outperform stocks or gold.
In general, people are aware of the art returns and even through they choose this form of investment because the lower gains are compensated by the aesthetic returns. Unfortunately, most of the academic studies do not include this non-monetary dividend yield, which are an essential discrepancy between art and strictly financial investments.
Besides the problem of inflation there are other features, which reduce the returns and unfortunately, most of the cited authors (the only exception is Frey and Pommerehne, who take into account additional costs) do not incorporate them in their researches. High transaction costs, mostly in form of the buyer’s premium and seller’s commission, play an important role because they alter the return on the art more than the transactional costs in the financial investments. Additionally, the maintenance, storing, holding and insuring cost are borne by the owner each year and vary depending on the art features, like a reputation or size. Costs of obtaining information are less obvious when calculating the return but they are an obstacle in entering the art market and making an investment decision. To overcome the asymmetric information issue, large expenditures are needed. Fortunately, the taxes influence the rate of return only slightly.
Are the academic researches trustworthy then? They should be treated rather as additional investment tip, as even without their work, it is known that the artworks are not the most profitable assets, especially when including the additional costs, but they offer the aesthetic returns, which determine an ever-increasing popularity of the art investments.