6/12/2015

Using Inflation and Income Linked Calculations


The NY Times has an interesting article about the highest prices paid for art over the years, and who tops the list after adjustments for growth in income and inflation. Using inflation adjustment calculators such as the consumer price index is one method to adjust and compare different prices from various points in time.

Some appraisers use the calculators to adjust values in an appraisal assignment, but keep in mind there are always other variables to be factored in, such as changes in taste and styles. It may be used as a tool and a guide, but other factors should be considered and given more weigth.

The NY Times reports
LONDON — Has the world’s most expensive art ever been so expensive? And if it hasn’t, what does that tell us about the world we live in?

These were two questions worth asking after the sale of a Picasso last month at an auction in New York for $179.4 million. That was three months after it emerged that the state of Qatar had discreetly purchased a Gauguin painting for an undisclosed sum that could be as high as $300 million.

In pure dollar terms, the prices paid for Picasso’s “Les Femmes d’Alger (Version ‘O’)” and Gauguin’s “Nafea Faa Ipoipo (When Will You Marry?)” represent highs for art sold at a public auction as well as through a private transaction (though the exact price Qatar paid has yet to be confirmed). But can these figures be regarded as records if the exceptional prices paid for art in the 20th century are adjusted for inflation?

What about, say, the $1.5 million that Nicholas II, the czar of Russia, paid privately for Leonardo da Vinci’s “Benois Madonna” in 1914? Or the $82.5 million that the Japanese businessman Ryoei Saito gave for Van Gogh’s “Portrait of Dr. Gachet” at Christie’s at the height of the great Impressionist auction boom in 1990?

One standard way to adjust historic art prices to account for inflation is to run them through the U.S. Department of Labor’s Consumer Price Index inflation calculator. Using this method, the czar’s big 1914 price for the Leonardo — hailed by Gerald Reitlinger in his 1961 study, “The Economics of Taste,” as “the most expensive picture that has ever been sold” — is equal to $35.5 million today, which would buy a middling-quality Mark Rothko.

The 1990 price paid for Van Gogh’s “Dr. Gachet” adjusts to $149.3 million today — a big number, but not as big as the $179.4 million bid last month for that Picasso, whose buyer remains unknown, as does the current owner of that van Gogh.

The problem with using price indexes is that economic growth creates an inherent bias toward the most recent data, economists say.

The table below (click HERE to view the table) includes the work and the artist, the buyer and year the sale was made, the price at the time and an inflation-adjusted price, the United States per capita income that year, and the number of years it would take for someone with that income to purchase that work of art.

“It’s O.K. to use the C.P.I., but I think it would be even more meaningful to take into account the rise in average income and wealth over the period,” said Thomas Piketty, a professor at the Paris School of Economics and the author of the best-selling “Capital in the Twenty-First Century.”

Mr. Piketty suggested in an email that landmark art transactions from any given year should be divided by average per-capita income to reflect divergences of wealth. “It would be interesting to have some art price index over the entire 1914-2015 period and see whether it follows the evolution of inequality (I suspect it does),” Mr. Piketty added.

An income-linked list of 10 landmark art prices, together with their inflation-adjusted equivalents, from the past 100 or so years is revealing. The list accompanying this story uses data on America’s per-capita national income from the updated appendix of Mr. Piketty and Gabriel Zucman’s 2013 paper, “Capital Is Back: Wealth-Income Ratios in Rich Countries, 1700-2010.” (This is not a fully scientific ranking; it’s a list of landmark art sales in the 20th and 21st centuries that have been submitted to a consistent methodology. But no similar ranking appears to have been made.)

Using an income-linked list, trophy art has never been so expensive. Even so, the $1.5 million paid by the czar for that Leonardo, now in the Hermitage in St. Petersburg, Russia, remains a colossal price, reflecting levels of extreme income inequality in Russia that sparked a revolution. A century later, oil-rich Qatar is now the art world’s biggest sovereign-wealth buyer.

Then, as now, private transactions tend to be higher than auction sales. The British dealer Joseph Duveen’s 1921 sale of Gainsborough’s “Blue Boy” — a painting that is now totally out of collecting fashion — to the railroad heir Henry E. Huntington remains one of the coups of the century. The price included a $20,000 bill for a single telephone call, according to S.N. Behrman’s recently re-issued 1951 biography of Duveen.

The $616,000 paid in 1958 by the banking heir Paul Mellon for Cézanne’s “Boy in a Red Waistcoat” at Sotheby’s sale of works from the Jakob Goldschmidt Collection — the first-ever “black tie” evening sale — was hailed as an auction high for a modern work of art. But then Old Masters were still the dominant collecting taste. Also, as “Capital in the 21st Century” points out, at that time the richest 10 percent claimed less than 35 percent of America’s national income, down from 50 percent in the 1920s, when Huntington was spending $20,000 on phone calls.

It’s worth noting that this income-adjusted methodology ranks Van Gogh’s “Dr. Gachet” as the most expensive artwork sold at auction in modern times. That result was a direct product of Japan’s late 1980s “bubble” economy. Now, as the auction houses never tire of telling us, there are a lot more players at the top end of the art market from a lot more countries. No fewer than five telephone bidders were prepared to spend more than $120 million on Picasso’s “Femmes d’Alger” in New York last month.

“In the old days you had a small market. Now globalization is a huge factor,” said James Roundell, a director at the London and New York dealer and adviser Dickinson, who, while working at Christie’s in 1987, represented the winning Japanese telephone bidder for Van Gogh’s “Sunflowers.” That $39.9 million was the first of the modern “art boom“ prices.

“There’s a lot of fashion involved, and people are buying for show,” Mr. Roundell said. “I’m not sure that many of them are buying for the love of the object. For some, particularly wealthy Americans, it’s all about playing the market. Back in the early 20th century, collectors would buy a painting, live with it in their own home and leave it to a museum. Now it’s about acquisition, not collecting.”

As Mr. Piketty suspected, the history of exceptional art prices follows the “U-shaped curve” of 20th and 21st century income inequality.

“Global inequality of wealth in the early 2010s appears to be comparable in magnitude to that observed in Europe in 1900-1910,” Mr. Piketty said in “Capital in the Twenty-First Century.”

According to his calculations, the top 0.1 percent currently owns nearly 20 percent of the world’s wealth. Thanks to low interest rates and rising asset values, that share is growing. And so are the prices of the world’s most expensive art.
Source: The NY Times


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