What determines the value of a painting?

Valuing a painting is both an art and a science. Scholars have written many articles and books about it and it seems that valuing an artwork is almost more complex than quantifying other high value objects.

The reason for this is straightforward: The value of an artwork can depend on more than 40 different value drivers. These can be grouped into factors that are related to either the object, the artist or the market. Object specific value drivers include condition, provenance, material, dimensions, etc. Artist specific factors include information about the artist’s background as well as to which art movement or school the artist belongs, which museums collect the artist, which galleries represent him, etc. Lastly market specific factors take into account how popular the artwork is at a given point in time.

All of the factors above can be measured, but that is easier said than done. This is due to large parts of the data is not being easily accessible and even if it is available publicly, it requires in depth expertise and it can take many years of intense research to acquire the relevant knowledge.

It is therefore almost impossible for the every day person to determine the value of an artwork without the advice of a valuation expert.

How do experts value a painting?

When you ask professional art appraisers for a valuation, they will in most cases be able to give you at least a very rough idea shortly after a first glance at the artwork. They see hundreds of artworks every week and know instantly how much the painting is likely to be worth.

In most cases the paintings worth will be somewhere in the £500 to £5,000 range and therefore an indicative appraisal supported by some short research on historical auction results of comparable works should be sufficient. However, if the painting appears to be worth a lot more, the appraisers will have to do a lot more research. In these cases, it might be worthwhile to go to a leading auction house as they are specialised in appraising and selling high value artworks.

How can you measure the accuracy of auction houses?

The experts at auction houses like Christie’s, or Sotheby’s see hundreds of paintings every single day and know more than anyone else about the supply and demand for specific artworks. They know the market inside out and their expertise can, without doubt, be described as the gold standard of art valuation. But how accurate are their valuations really?

To measure the accuracy of auction estimates one should look at three factors:

1) How wide was the range between Low Estimate and High Estimate?

2) Was the sale price within the Low and High Estimate range?

3) How many lots did actually sell (Sell-through rate)?

How wide is the range between the Low Estimate and High Estimate of the auction houses?

Before a painting is sold, auction houses will provide for each object a valuation range between a Low and High Estimate. Just to be clear, this range doesn’t guarantee that the object will be sold in that price range. It can sell higher or lower, but as a lot of effort is put into the valuation of an artwork, one would expect this range to be reasonably accurate.

Let’s look at the big picture first. For the full year of 2018 the aggregated value of all Low Estimates of all lots sold at Sotheby’s was $4.1 billion. The aggregated value of all the High Estimates on the other hand was $5.7 billion. Therefore, the valuation uncertainty across all auctions was $1.6 billion or 38%.

38% difference between the Low Estimate and the High Estimate is a very wide range compared with other markets. Imagine you want to sell a house and the valuation you receive says it could be worth anything between $500,000 and $690,000. That doesn’t seem very accurate as property valuations tend to have a valuation range of 5%-15% which is less than half of what can be measured for Sotheby’s in 2018.

So, could it be that this large spread of 38% was driven by a specific event, category or region? The answer is no. We have looked at every single auction at Sotheby’s in 2018 and found very little variances between the regions, categories or events. There are some differences between individual auctions, however the average differences between the Low and High Estimates are very consistent across all major regions (North America: 38.0%, Europe incl. UK: 39.3%, Asia: 37.5%) and it can therefore be concluded that there were no single events or categories that drove the spread specifically.

How many lots sell within the price range of Low and High estimates?

None of the big auction houses report the percentage of lots which sell at a price that is either below the Low Estimate or above the High Estimate. We have therefore analysed a sample of results from the big auction houses and found that approximately 3%-8% of all sold lots sold for a price which was lower than the Low Estimate.

A similar picture can be observed at the other end of the spectrum. Our sample data shows that approximately 5%-10% of all objects sell above the High Estimate. The seller might welcome the ‘good news’, but nevertheless it is a data point that shows that the estimates were not very accurate and that typically around 8%-18% of all lots sell outside the given valuation range.

What percentage of lots sells at auction?

In addition to the 8%-18% of lots that sell either below or above the valuation range, there is a further percentage of lots that don’t sell at all.

Unfortunately, the big auction houses fail to report this number consistently. Sotheby’s (the only listed auction house) make no reference to their sell-through rate in the 2018 annual report. However, it was reported that for the first six month of the year only 80% of all objects offered at Sotheby’s actually found a buyer.

In addition to the half year figure, Sotheby’s has published sell-through rates for certain auctions in the second half of the year. These were similar to the 80% reported for the first six month and it seems therefore reasonable to assume that the percentage of lots sold at auction for the full year was also around 80%, which means that 20% of all lots offered failed to find a buyer.

How accurate are auction estimates – Adding up the numbers

One would normally expect that the big auction houses are able to value artworks precisely. However, a look into the data reveals that the accuracy is not as good as one might hope to expect.

The spread between the Low and High Estimate averages at 38%. In addition to this wide spread, 20% of the lots offered failed to find a buyer and another 8%-18% did in-fact sell for a price that was outside the valuation range that was either below the Low Estimate or above the High Estimate.