“Art is not what you see but what you make others see,” Edward Degas once observed – although, when he did so, the great French painter and sculptor presumably was not thinking about loan collateral.
And yet it appears that is precisely what an increasing number of art owners are making others see these days when they look at a painting or a sculpture.
As a recent Economist article – with the self-explanatory headline Borrowing against art is growing at a stunning rate – puts it:
“Behind the world’s most beautiful paintings lies a borrowing binge.” “Selling art can take months, even years,” it goes on to explain. “The only way to unlock its value quickly is to borrow against it. And indeed the number of owners doing so is rising.”
The piece highlights an estimate from accounting firm Deloitte that the outstanding value of loans against art in the US hit somewhere between $17bn (£14bn) and $20bn in 2017 – up 13% on the previous year.
Furthermore, suggests the Economist, this trend is showing little sign of letting up with “industry insiders” indicating this type of lending has continued to grow “at double-digit rates”.
Even a decade ago, the idea of borrowing money against works of art was pretty much unheard-of beyond the walls of the world’s private banks.
What is more, that sector tends to ensure any such loan is ultimately secured by a client’s entire balance sheet – in stark contrast to the growing number of specialist boutique lenders, which appear happy to accept individual pieces of art as collateral.
According to this piece on the Artsy website, there is no such thing as a standard loan, with terms and borrowing rates depending on a work of art in particular and the creditworthiness of a borrower in general.
Lenders also tell the site that default rates for this type of lending are “typically very low, almost negligible”, with one offering a simple explanation: “People don’t want to lose their art.”
Just how long this state of affairs can persist must surely, however, be up for debate – particular given how, returning to that Economist article, we find still more unnamed “lenders” saying inquiries from wealthy clients about leveraging their art collection are on the rise.
Clearly such clients are feeling pretty comfortable about the levels of debt they are taking on – yet this in itself can precipitate less comfortable conditions.
Not for the first time in recent years, here on The Value Perspective, we are reminded of economist Hyman Minsky’s hypothesis on financial instability – that “the illusion of stability of the system will, over time, create its own instability”.
Also known as “ the paradox of tranquillity”, what happens in essence is a benign environment triggers two actions – leverage and additional risk – that themselves create instability.
As we have argued before, in articles such as The calmest markets in 20 years – and why that should make you nervous and The investment now giving central bankers the jitters, investors betting on low volatility are effectively betting the current benign environment will persist. In doing so, they are taking on more risk than they might imagine – and the fact this is now happening in a sector that has, until recently, seen very little leverage does not in our view paint a particularly pretty picture.