3rd March 2018
The art world has a reputation of being under handed. There is no regulation in this market, the price of a picture is not even quoted. The artists and dealers protect themselves by saying this allows the viewing to be totally about the art and not the price. In theory, and sometimes in practice, dealers will quote a different price depending on who they are speaking to. Why would they do this? Because, depending where the piece ends up will affect the future of the artist. In certain galleries the artist will gather repute, and in the home of a private collector who perhaps does not even know what he’s buying, the sale will have little impact.
Given this is only one thread of how the art market works, it is refreshing when there is an auction, as anyone who qualifies for a paddle can come in and bid. The auction room offers transparency. OR does it?
Like the property market, auctioneers often have a habit of what they call in the art market chandelier bidding. The term for the property market is bidding against the wall, as you don’t always have a chandelier in the humble rooms used. Here, the auctioneer starts the bidding below the reserve price, and if there are no bids in the room they pretend there are bids coming in until they hit the reserve price. Not exactly transparent.
In the art market there are also those who have vested interests, and want to ensure the prices are kept up to a level. There is no intrinsic value to a piece of art, it is paint and canvas. If they have a collection of a particular artist, they do not want to see a single piece sell for less than a certain amount. They will ensure someone at the auction will be bidding up the price, if this means they end up with the piece so be it.
In the property market, unlike the art market, there is transparency in terms of pricing. One can see within minutes what all the other properties in the block or street have sold for, and when the sale occurred. You can also see the ownership details, and whether they have a mortgage and with whom. This is arguably perhaps a little too much information. This is the issue of the property market, there is too much information and therefore the margin is very tight; meaning everyone knows the construction cost, and the resale values. Therefore, when selling a development you will sell it leaving approximately 25% for the incoming developer. If the market turns, the developer will struggle, depending on where he is positioned in the market. The top end will feel the pinch more generally.
The property auction market may look transparent and on the whole is, however, those who know the rules also know how to bend them. With the influx of retail investors, many auctions instead of being the realm for dealers, have now become a dumping ground for traders. With the idea being to dupe the unsuspecting buyer, whilst complying with the letter of the law but not the spirit.
We have seen several cases of buyers ending up with lemons from the auctions. However, auctions can also be a great place to pick up opportunities, and you do have the security of actually getting the deal done. One just needs to exercise a healthy dose of caution when tackling them.