James Goodwin offers some advice on the art market as an investment vehicle on the UK website, Investor’s Chronicle:

Art’s uniqueness and the vagaries of taste give it a lasting, but also uncertain, value. Lack of market transparency and uneven supply, little or no income, and high transaction costs, resulting in low liquidity and long holding periods, have prevented art from developing into a conventional investment asset. Furthermore, the capital appreciation has to be much higher than most assets to make up for the cost of acquisition and disposal, valuation and provenance research fees, as well as tax, insurance, conservation and storage. [ . . . ]

At best, the returns on art can be very respectable. Until 2004, the world’s most expensive painting sold at auction – Picasso’s Garçon á la Pipe sold for $104m giving its owners an average annual return of 14 per cent after costs. It was bought for $30,000 in 1950. More dramatically, at the contemporary art auctions in London in June 2006, 44 of the 697 lots measured by repeat sales returned an annual average of 13 per cent to their owners after costs, according to research by this author and Dr Rachel Campbell of Maastricht University.

And it is modern and contemporary art that is in the ascendancy. The antiques market (art more than 100 years old) has suffered, shrinking from a world market share of 24 per cent to 17 per cent in favour of 20th century modern, post war and contemporary art. Over half the top 200 collectors internationally collect post war and contemporary art above all art forms, according to ARTnews magazine. The world’s second-oldest art dealer, Agnew’s in Bond Street, London, whose 200-year-old history includes sales of the greatest old master paintings, is now emphasising contemporary art.[ . . .]

Goodwin points out that the art market is loosely correlated to the financial markets and the broader economy. He predicts a slowdown in the next 9 months. But bigger drops happen when there is a secular shift in the market:

Even more dramatic and prolonged falls occur with the passing of a generation of collectors, when fashions change and prices appear out of reach, and during periods of international trade protectionism. The Japanese-inspired art investment boom and bust of 1985-90 raised Impressionist prices to unrepeated levels and ushered in today’s pricier modern and post war art. The breakdown of the free-trade system after the 1870s coincided with the demise of British contemporary art price levels following a 60-year golden age for living painters. [ . . . ]

In 1991, when the art market last turned from the Impressionist-led boom to bust, the highest price paid was for an old master painting. The following year, 56 per cent of Sotheby’s sales were for decorative art compared with 38 per cent during the 1990 boom. In recent years, one of London’s best-performing art dealers, measured by return on capital, sells supposedly unfashionable antique English furniture.

Art for Investment’s Sake (Investor’s Chronicle)