- Apr 1, 2005
- 41,363
- 74,893
That is based on the idea that a painting has an intrinsic value (your £10m "starting" price) which it doesn't.
Things are only worth what people are willing to pay for them. That's the definition of market value. If somebody is willing to pay £35m for Andy Carroll it doesn't mean that he has magically got really good at football - it's just the market conditions at the time defining the value. The market at the time was willing to pay that amount so that's his value at the time.
Art is weird because it generally appreciates with age without an expiry date (unlike a footballer, or much else) and because it's so dependent on fashion it means the price can sky rocket for weird reasons. It's not a bunch of art owners flogging stuff to each other at increasing prices in order to fraud borrowing.
In your scenario, the people have not really increased their wealth because those sales are false and do not reflect the true market value. If you used the painting as leverage, the lender would want it appraised according to the public market where it's value of £10m would become apparent. That value would be based upon similar sales etc. and not just what your mate says he would buy it for. That's the boring truth unfortunately.
But we should ignore that and think of it this way... Joe Lewis used to own a big piece of paper that was worth twice as much as Andy Carroll ever was!
They are setting the prices as 4 of them had been sold at that price. Yes it might be artificially inflated but most markets are and there is a risk of the bubble bursting. A great example was the tulips in the netherlands. Nothing can naturally gain in value because as you've said it all depends on what people are willing to pay for it.