Today’s art-backed loans have gotten larger and riskier for collectors as the art market has started to shrink. U.S. collectors staked their art to borrow up to $24 billion this year, more than double the level a decade earlier, according to the latest data compiled by the Deloitte accounting firm and ArtTactic, an auction-database company. Some affluent borrowers tap their art like a piggy bank to fund living expenses. Others use the loans to buy more art.
But after a four-year rise, the global art market has started to retrench, with the value of sales down 22% at Christie’s auctions in the first six months of 2019 compared with the same period a year earlier. Last week’s $1.4 billion major fall auctions in New York were a third smaller.
If art values plummet, experts say, collectors may need to sell works for less than they are valued to pay down their loans—or add more pieces to their collateral pool to keep their loans square. If not, they could default on loans and forfeit their art altogether.
“If everyone is taking the same art as collateral—same artists, same bodies of work—and there’s a crisis, everyone may need to sell and you have a big problem,” said Adriano Picinati di Torcello, who issued the Deloitte-ArtTactic report last month.
Borrowing against hard assets has been a major investment theme over the last decade. A friend of mine is even involved in assisting art owners to collateralise their wealth via cryptocurrencies which in summary leverage on leverage. I haven’t heard the term collateralised crypto obligation (CCO) yet but it is certainly a growing field.
The bigger picture is extraordinary monetary policy inflated the prices of just about all private assets and the sums involved are mindboggling. There has also been a parallel program run by banks to offer loans for lifestyle purchases, such as boats and planes collateralised with stock portfolios.
The clear message is private markets is where the bubble risk currently resides. The contagion risk rests in how pension funds and insurance companies have bought alternative assets in their pursuit of yield. The stock market remains steady but monitoring the private markets is. I believe the most important cautionary action we can take a present.
This article on risks in the collateralised loan market may also be of interest.