How is Artwork Valued?
What’s in a Salvator Mundi? You know, the most expensive work of art in the world? The painting that sold for $450 million at Christie’s auction? The one that the seller, Dmitry Rybolovlev, thought he’d been ripped off when he bought the painting for $127 million from an art dealer called Yves Bouvier only to discover Bouvier himself bought it for $70 or $80 million?
What separates Salvator Mundi from your average art fair seascape? Other than the world-famous signature, anyway.
This comes back to an important question for would-be art investors: how is art valued? It’s a more complicated question than you’d think. Here’s an overview of how it works, and why some art is so insanely valuable.
Why is Art Expensive?
To understand how art is valued, it helps to understand what makes art so expensive.
The short answer: most art isn’t.
The slightly longer answer: most art isn’t insanely expensive, but some art is, and it exerts a pull on the entire market.
Breaking Into the Art Market
First is the cost of breaking into the art market. Here’s a hint: it’s not cheap.
In order to break into the art market, artists need a gallery to represent them. It’s difficult to understate the importance of gallery representation—gallerists keep a stable of artists and a stable of regular buyers, and they do triple duty as a sounding board, public platform, and income source. But first, artists have to get noticed. They can’t just stroll into a gallery with their portfolio in hand.
For most young artists, their MFA is the entry point, since gallerists routinely visit MFA student shows to pick up fresh talent. For the top 10 best programs, the average tuition runs at $38,000 per year, meaning an artist spends $100,000 just to get noticed. Bear in mind that your average large painting sells for $10,000 to $15,000, with works on canvas priced higher than paper or prints, and regardless of the artist or gallery’s prestige, galleries almost always take a 50% cut of artist sales.
If the artist stands out, their gallerist may feature them in a group show. If their work sells well, they can score a solo show. And if that goes well, their career can take off.
Unique Features of the Art Market
Here’s the catch: the art market is unlike any other market in the world. This is best exemplified by how it handles market-moving information, which is why artists need gallerists to break in.
By and large, the art world operates on personal relationships between gallerists and buyers. Let’s say a dealer knows that an artist will be featured in a major museum show in the next two years, which would likely raise the artist’s value. They would offer up the information (and a few selected works) to a prospective collector so that they can snatch up the works and sell for a profit down the line.
Sound familiar? You’ve heard of a familiar concept before in the stock market. It’s called insider trading. In the stock market, that’s illegal. In the art market, it’s not only acceptable and legal, but also standard operating procedure.
How is Art Valued?
Once you keep that framework in mind, we can answer the overarching question of how art is valued. This breaks down into two factors: visible factors and invisible factors.
Visible Factors: Provenance, Demand, Reputation, and Scarcity
First are the visible factors. These are the obvious key attributes of an artwork that can be readily verified with a bit of expert assistance, such as:
- Authenticity (whether it’s real)
- Provenance (the history of who it belonged to)
- Attribution (who made it)
- Historical significance
- Popularity of the artist
- Typicality (whether it’s a style typically associated with the artist, a la Picasso and Cubism)
- Subject matter
Out of all of these, the heavyweights are attribution, authenticity, and provenance. It might seem absurd to think that previous ownership of a painting could radically affect its value, but remember, the art market is simultaneously a global consensus machine and a global status network. Art has value because people agree it should, and the reputation of previous owners drives excitement.
Just look at Mark Rothko’s White Center, a.k.a. the Rockefeller Rothko. The Rockefeller family is one of America’s most powerful dynasties, and among their impressive collection was the aforementioned Rothko. The painting was worth less than $10,000 when David Rockefeller bought it, but it later sold for upwards of $72 million, in large part due to its colloquial reputation as the Rockefeller Rothko.
Primary vs. Secondary Market
This is where we get into the primary versus secondary art market.
The primary market is the direct handoff from artist to seller to the first owner. All art passes through the primary market exactly once. The vast majority of art market sales happen on the secondary market (passing from one owner to the next). The secondary market is where an artist gains reputation (based on their popularity, who owns their work, how much it’s worth, etc.) and thus where art gains most of its value over time.
The secondary market is also where the invisible factors of art value come into play. These factors cannot be seen or predicted, but they exert a gravitational pull over an artist’s entire body of work (and the art market as a whole).
At their root, these invisible factors are rather simple: it’s all the art in the world that has not, can not, or will not come to market but exert an unseen pull on the art that is on the market. Think of it as a reservoir of non-transactional work. This is important because it underwrites the scarcity of the art that is available on the market, thus aggravating demand and supporting rarified prices.
These reservoirs come primarily from two places: museum accessions and philanthropic giving. Think of these as black holes into which art vanishes. When this happens, the pieces are unlikely to ever hit the market again, thus reducing the available supply of an artist’s work while driving up the artist’s reputation in the process (after all, an artist good enough to display in MoMa is worth more than your average unknown corner gallery).
Your Expert Partner in Blue-Chip Art Investing
How is art valued? In short, by a confluence of difficult-to-predict factors that require an expert hand to navigate. The good news is that the structure of the art market drives the greatest liquidity in the blue-chip art market, which also happens to be the most valuable and profitable art market sector. In fact, blue-chip art has outperformed the S&P 500 by 180% from 2000–2018.
And now, on our platform, you can invest in authenticated multi-million-dollar art starting at just $20 per share. We take care of the research for you (with help from our research partners at Citi Bank and Bank of America) to identify high-value artist markets with the highest potential risk-adjusted returns, along with a team of art experts to handle authentication, purchase, and sale. All you have to do is collect your dividends.