Now that the New York Times has put the issue of rising direct guarantees from the auction houses on the table, let’s talk about an assumption that seems to accompany any discussion of guarantees. That’s the idea that guarantees create artificially high art prices.
Georgina Adam provides a perfect example of the logic in her Financial Times column. This quote is from late last year in response to New York’s monster sales:
To what extent are these dizzying results due to the extraordinarily high level of guarantees? […] In the current market, the very top is the strongest, so trawling in the most expensive works of art seems to be successful. Unfortunately, it is impossible to drill down much further into this financial instrument which seems to be so effective at pushing up prices – if not profitability.
The problem here is that Adam has conflated two very different trends. Guarantees create much larger auction totals, that’s very true. But there’s no evidence, anecdotal or data-driven, that individual guaranteed lots sell for more than lots that do not have guarantees. What would be the mechanism that would compel buyers to spend more on a work because it has been guaranteed? Bidders do often vote with their feet by refusing to bid on works they feel are over-priced.
In fact, a case can be made (again, without much evidence) that guarantees suppress the price achieved on individual lots even as they drive overall sale totals higher.
We can address that argument below but first let’s look at this conflation. Two recent stories—as well as Graham Bowley’s story in the Times—identify the reason auction houses invest in direct guarantees. They’re a way to combat the eroding margins. Sotheby’s and Christie’s have two competitive tools, offering discounts on their commissions or assuming risk.
Melanie Gerlis addressed this in her story in The Art Newspaper on the auction houses at the crossroads:
One problem, says David Schick, a research analyst at the US investment firm Stifel, is that most of the heat has been at the top end of the contemporary and Modern art markets, where the opportunities are “thin” compared with the broader $100,000 to $500,000 range. At this top end, the commissions are lower—buyers pay 12% over $2m and sellers’ fees are often waived.
“Both houses are after headline prices, which limits profitability,” Schick says, attributing this to “a number of soft years” since the 2008 downturn. Plus, the auction houses have been offering incentives such as guarantees and profit shares to prime sellers.
“They’ve made it harder by competing against each other … you hear about some suicidal deals,” says Pilar Ordovas, a London dealer, formerly the deputy chairman of Christie’s Europe’s post-war and contemporary art department.
With all the opportunities supposedly at the top of the market, guarantees offer a high-risk, high-reward way to access the best works. Why? Owners of art have no motivation to sell. They own the works that are perceived to be continuing to rise in value. Selling today is merely giving up value tomorrow unless the guarantee is too attractive to pass up.
The Wall Street Journal underscores that guarantees equal margins for the auction houses:
Partly to boost profit margins, Ms. Barbizet let Christie’s promise sellers that the auction house would buy more artwork with its own money if no one bid on those pieces, rather than offload that risk to outside investors. The move helped Christie’s reap higher profits from last month’s $853 million contemporary-art sale, the biggest auction ever. The auction house collected roughly $50 million.
So now we know why the auction houses offer guarantees. They can boost their sale totals and get more opportunities to make a profitable sale on the guaranteed works that sell above the level of the guarantee where the auction house has negotiated a greater share of the upside that they would get from a normal commission or from offering the seller a break on the commission.
Remember, no reluctant seller is going to be persuaded to part with a work by being told they will get some of the buyer’s commission. There’s still too much risk in that. Waived or enhanced commissions are for sellers who come to both auction houses. Guarantees are for sellers who need to be persuaded that now is the best time to sell. That’s what happened with Sotheby’s much covered Giacometti (an example of the bidders seeming to go on strike) and Modigliani sales last November.
Now, let’s talk about how guarantees might suppress prices. Yes, guarantees might be keeping prices down. And there’s an argument to be made that the auction houses would be more profitable if they had smaller sales with more judiciously chosen, un-guaranteed works.
Auction house guarantees, direct or third-party, exist to induce sellers to part with their work. Experienced art market professionals will tell you that the best results for any work are achieved by offering the lot with a low estimate that attracts potential buyers who are likely to drive the price higher through active and extended bidding. Record prices come when exceptional works are offered this way. But this type of sale involves a great deal of risk. There’s always the chance bidders won’t show up and the lot will fail or sell low.
If the potential buyer knows the seller has only consented to sell after getting a guarantee, they’re unlikely to feel the work on offer presents an opportunity that others won’t see. So there’s every chance that many guaranteed works would achieve higher prices if offered without guarantees and with lower estimates. Some guaranteed works that have been bought in and then offered later in different sales with lower estimates have out-performed their guarantees.
Pole position in Mayfair (FT.com)
High-level exits herald change at big two houses (The Art Newspaper)