Everyone who is anyone in the art world was in London last week for a series of sales and fairs.

The trouble is, too many collectors left their chequebooks behind in the clearest sign yet that the global financial crisis has finally caught up with the art world. Experts warn that things are likely to get tougher.

A far bigger test for a market which had largely defied the gravity of economic gloom comes next month, when Sotheby's and Christie's, the two dominant auction houses, hold major sales in New York. The Art Basel Miami Beach show follows in December.

"Now is not a brilliant time to be selling -- people are facing such a complicated financial situation they are not prepared to do anything," said Philip Hoffman, chief executive of the Fine Art Fund Group.

"The market place is much tougher, and in light of what's happened in the financial markets, the art market cannot be immune to it. Liquidity is tighter everywhere."

London has just hosted the annual Frieze Art Fair, which has become synonymous with the big-spending rich and super-rich as they pay astronomic sums for choice paintings and sculptures.

After years of rapid growth, the mood among dealers this year was more cautious, and at glitzy champagne receptions and pricey dinners across the city the talk was as much about financial meltdown as about fine art.

Auction houses selling some of the best works on offer were not spared, with Christie's, Sotheby's and Phillips de Pury holding weekend sales that fell well short of the low estimates -- something almost alien to the art market in recent years.

But while experts acknowledge that there are problems, they point out that art values are still historically high and that a single week's sales in London was not enough to sound the death knell for an extraordinary bull run.

"It is far too early to announce the demise of the market," said Charles Dupplin, art expert at specialist insurer Hiscox.

"One set of sales which have come at a time of particular horribleness in financial markets, which must affect people's confidence, is not enough to say the party is over in the art market," he added.

Dupplin and others pointed out that compared with stocks or other traded instruments, the art market was far less transparent, and what went on in the showrooms of top auction houses and galleries was only the "tip of the iceberg".

Financial Crisis Cools Down Art Market

Damien Hirst's work has high price at Sotheby’s

For months, art dealers, critics and auctioneers have claimed that the art market would remain miraculously immune to the global financial crisis. As if Damien Hirst were some kind of thaumaturgical icon that could save the day with his formaldehyde sacred cows and sharks, or that Russian and Middle Eastern collectors, with their seemingly unlimited wealth, would shield the market by continuing to waggle their bidding paddles with abandon at auction.

There were warning signs from the market. Sotheby's (nyse: BID - news - people ) stock is down 83% from this time last year. And on Oct. 15, as the art world entered its biggest season for sales, the Dow plunged more than 700 points again, forcing many dealers, auctioneers and other cheerleaders to recant prior bravado.

Fall really is the season for the art market. Gallerists, auction houses and collectors spend the sleepy summer vacation looking forward to the biggest fairs worldwide and major auctions of modern, contemporary and Asian art--three sectors that have been keeping the art market afloat in recent months. All eyes were on London in recent weeks as Sotheby's, Christie's and Phillips de Pury held their major fall evening sales of contemporary art in conjunction with one of the world's most important art spending sprees, the Frieze Art Fair.

Based on what went down in London, it seems that the once-healthy art market may have finally caught that financial cold that has laid the rest of the world low.

A Dreary Night for Contemporary Art at Sotheby’s

Head and Bottle--------by Philip Guston

In a salesroom overflowing with collectors like the actor Steve Martin, the financier Eli Broad and the fashion designer Valentino, Sotheby’s barely managed to sell $125.1 million worth of contemporary art on Tuesday night, well below the low estimate of $202.4 million.

“It was a half-price sale,” said Mr. Broad, who went on his first shopping spree in several years. In less than 90 minutes, he dropped more than $8 million (including Sotheby’s fees) on works by Ed Ruscha, Jeff Koons, Robert Rauschenberg and Donald Judd.

Bidding was fairly sparse throughout the night — of the 63 lots offered, 20 failed to sell. But some art was coveted. The evening’s star was an Yves Klein wall relief from 1960 featuring the artist’s signature rich saturated blues. It was being sold by Magnus Lindholm, a Swedish collector, and was estimated at more than $25 million. It brought $19 million, or $21.3 million with fees: under the estimate, but still hefty.

(Final prices include the commission to Sotheby’s: 25 percent of the first $50,000, 20 percent of the next $50,000 to $1 million, and 12 percent of the rest. Estimates do not reflect commissions.)

“At the right level, the market exists,” said Tobias Meyer, the head of Sotheby’s contemporary art department worldwide and the evening’s auctioneer. “But the audience is smart and seasoned.” He said prices had rolled back to 2006 levels.

But when Mr. Meyer and Sotheby’s experts were putting together Tuesday night’s sale, it was summer and the world was a far richer place. So was Sotheby’s, which agreed to financial deals that might have seemed sensible months ago but made for what must have been an expensive evening for the house.

Philip Guston’s “Beggar’s Joys,” for instance, went on the block with a big guarantee, an undisclosed sum promised the seller, in this case Donald L. Bryant Jr., a New York collector.

Great American Nude by Hassan Musa

Mr. Bryant, watching the auction in a skybox above the salesroom, looked intent when his work came up for sale. Executed in 1954-55, the abstract canvas of lush reds and pinks attracted only one bidder, Mary Zlot, a San Francisco art adviser. Prices have soared since 1996, when Mr. Bryant paid a record $1.7 million for the work at Christie’s in New York. Sotheby’s experts estimated it would bring around $15 million. So confident were they that it is said they gave Mr. Bryant a guarantee of around $18 million. In the end, Ms. Zlot paid $9 million, or $10.1 million with fees.

Another big-ticket item, and the cover image of the sale’s catalog, was “Half Face With Collar,” a comic-strip painting from 1963 by Roy Lichtenstein, but it was one of the evening’s many casualties. Gian Enzo Sperone, an Italian dealer, was the seller. Estimated at $15 million to $20 million, it had no takers. Sotheby’s is thought to have guaranteed it for about $15 million.

Mr. Sperone wasn’t the only dealer selling work that Sotheby’s had guaranteed. Anthony d’Offay, a London dealer, was parting with several items, like Cy Twombly’s “Untitled (A Painting in Two Parts) (Bassano in Teverina),” a 1986 abstract Roman landscape that was estimated at $4 million to $6 million. Two bidders went for the painting, which sold to the same telephone bidder who bought the Klein. The price was $4.2 million, or $4.7 million including Sotheby’s fees. Mr. d’Offay was also selling Jeff Koons’s “Wishing Well,” a mirror with an elaborate gilded wood frame. It was one of the more popular works, with four bidders wanting to take it home. Mr. Broad succeeded in outbidding them, paying $2.1 million, under its $2.5 million low estimate.

Wishing Well," by Jeff Koons

It was obvious throughout the evening that Sotheby’s had worked hard to persuade sellers to lower their expectations. Many works sold, therefore, but for well below their estimates. A 1991 painting by Lichtenstein, “Interior With Red Wall,” brought only $6.2 million, or $7 million with commission, from a lone telephone bidder. It had an estimate of $8 million to $10 million. Tom Wesselmann’s “Great American Nude #21,” a 1961 Pop collage, seemed like a bargain when it sold to a telephone bidder for $3.6 million, or $4.1 million with fees. It had been priced at $6 million to $8 million.

Last season, the market could not get enough of Richard Prince’s nurse paintings. (One at Sotheby’s in London this summer fetched $8.4 million, a record for the artist at auction.) Several more are at auction this week. On Tuesday night, “Everglade Nurse,” a 2003 image in which the nurse’s seductive eyes stare from the canvas, was estimated at $4 million to $6 million. A telephone bidder was able to snag it for a mere $3 million, or 3.4 million with fees.

There was no bargain to be had when it came to a painting by John Currin. Dean Valentine, a Los Angeles collector, was selling “Nice ’n’ Easy,” a 1999 painting of two Renaissance-inspired nude women that Sotheby’s had priced at $3.5 million to $4.5 million. Three people bid, and it sold for a record price of $5.4 million.

Two minor works by Damien Hirst, both made last year, were up for sale. After his landslide auction in London in September, observers wondered whether the Hirst appetite would subside. “Ethionamide,” a dot painting, went without a bid. Its estimate of $1 million to $1.5 million seemed expensive. But “Midas of Phrygia,” a round, gold canvas dotted with butterflies, brought $700,000, or $1 million with Sotheby’s commission, from an unidentified buyer, well below its $1.2 million to $1.5 million estimate.

Buyers were clearly careful about parting with their cash, wondering if better bargains were around the corner. “I don’t think we’ve reached the bottom yet,” Mr. Broad said as he was leaving Sotheby’s after the sale. “We may be close.”

Financial crisis puts chill in Asia art sales

Yue Minjun---Goldfish

The past few years have been golden for hundreds of such modish art galleries and antiques dealers dotted about Hong Kong island’s jumbled streets, swept along by the Asian art craze and its hip allure with buyers in the region and beyond.

Glitzy art fairs sprang up across Asia, from Shanghai to Tokyo, while records tumbled for contemporary artists such as India’s Subodh Gupta, China’s Zeng Fanzhi and Indonesia’s I Nyoman Masriadi.

But now with the financial gloom, many galleries are bracing for a painful slump as the disposable income of the city’s bankers, businessmen and middle-class professionals shrink.

While some galleries with their patient stabling of loyal artists and diversified client base have yet to be badly burnt, the high-profile art auction market is showing serious strain for both Western and Asian art.

Sotheby’s auction of Impressionist and modern art in New York earlier this week fell far short of the US$338 million to US$475 million that had been expected, as buyers swooped for rare masterpieces but stayed away from lesser works that were generally seen as unrealistically overpriced.

At Sotheby’s autumn Asian sales in Hong Kong, seen as a key biannual barometer of market sentiment, the firm only managed to hammer off around half its expected total, with auction rooms stricken by large numbers of unsold lots.

“The Little Mermaid” by Liu Ye via Sotheby’s

Sotheby’s weak showing seemed to mark a symbolic turning point for the seemingly unstoppable Chinese art market, which has skyrocketed these past four years, particularly the works of star artists such as Zhang Xiaogang, Yue Minjun and Cai Guoqiang.

Some experts say the less established reputations of Asian artists versus timeworn western masters make major record-breaking results unlikely at the current time, but their much cheaper valuations make such artists attractive for buyers seeking long run returns.

Chinese art website Artron.net showed a 14 percent fall in its Chinese contemporary art index this autumn compared with the spring, while its benchmark index of 400 top Chinese artists showed a 28 percent decline for the same period. Much attention is now focused on the next major auction of Asian art by Christie’s in late November, with the auction house moderating its usual bullish optimism with a more prudent line.Others however go further.

Mei Jianping, a academic who created the Fine Art index, a widely cited measure of mostly Western art market performance, said the contemporary art market could plunge by 50 percent.

Yet for some gallery owners, the headwinds in Chinese and Western art are being seen as a blessing in disguise.

“I always try and be positive,” said Nicole Schoeni, owner of the pioneering Schoeni gallery, one of the first in Hong Kong to promote contemporary Chinese artists such as Yue Minjun in the 90’s.

Tough times will provide opportunities

After half a decade of unprecedented growth, the art market has been brought back to earth. Recent results from London contemporary auctions confirmed the fear that the art market is in for a correction. A total of £51m was raised in the evening sales, against a low estimate of £105m (51% below the low estimate). A total of 15 lots were sold for a discount of 30% to 60% of the low estimate, signalling that a major price adjustment is underway for a number of artists.

So was this a surprise? In November 2007, the ArtTactic Art Market Confidence Indicator fell 40%, signalling a significant change in sentiment from the previous reading in May 2007, largely caused by a gloomy outlook on the economy. The correction started in autumn 2007, but record volumes and prices at the top end of the contemporary art market disguised the fact that the trouble had already started further down the value chain. The first real sign that the art market was feeling the heat of the financial crisis came on 8 November 2007. The impressionist and modern sale in New York took in just under $270m, falling short of its low pre-sale estimate of $355m. The sale sent Sotheby’s share price down 28%, a slide that has continued until today—reducing Sotheby’s market capitalisation to $580m, down from $4.2bn a year ago.

In June 2007, ArtTactic’s Auction Indicator (measuring the relationship between the number of lots selling above the average estimate) changed direction, and fell 48% by May 2008. This was an early sign of what has become the market’s biggest problem—the failure to adjust estimates and expectations in light of the global economic environment. The hubris caused by ever-rising prices and high expectations of sellers forced the auction houses to be over-aggressive in setting their estimates, and limited their ability to adjust to the situation.

But why did the art market believe it was a “special case” that somehow operated independently of what was going on? It rested on one argument: the rapidly growing number of high net worth individuals in emerging markets, such as Russia, India, China and the Middle East. This new wealth had been building the foundation for art market booms in their own countries, and the increasing participation of these new buyers in western auctions was going to substitute for the wounded western buyers, hit by the financial turmoil and credit crisis. It worked, for about a year. But when the latest bout of turmoil in September 2008 also sent emerging financial markets (and art markets) into a tailspin—the foundation on which the “special case” argument was built suddenly vanished.

So what’s next? Is the future of the art market that bleak? No, this will be a market for new opportunities. Major collectors are waiting for prices to come down 30% to 40% from their peak, a correction that was already evident in the latest round of auctions in London in October. Certain works by artists such as Yue Minjun, Rashid Rana, Banks Violette, Anish Kapoor, Damien Hirst and Takashi Murakami were selling for 30% to 60% below the low estimate. Further pressure on prices is expected, and it will take some time before the market has reached equilibrium.

Now the question is: which artists will survive the adjustment? We all know what the last crash in 1991 did to hotshot artists such as David Salle, Julian Schnabel, Eric Fischl, Francisco Clemente and Sandro Chia. Their markets took 15 years to recover, and in real terms (adjusted for inflation) are still considerably below their peak, but at least their markets survived. Other stars of the time were not so lucky—history is likely to repeat itself.

The primary market is also likely to regain the balance of power compared with the auctions. The auction houses have dented their credibility as money-making machines, and would-be sellers are realising that the liquidity is quickly evaporating. In a falling market, the focus will again be directed towards the galleries that have proved their commitment to their artists.

In the end, a correction is healthy for the sustainability of the future art market. The interest in art will not disappear, art and artists will not disappear—if anything, a tougher environment will be more conducive to artistic creativity, and hopefully the market will go back to focusing on what constitutes the real value of art, as art history is rarely made in the auction rooms.