What makes art so expensive? | CNBC Explains

How do you put a dollar value on a piece of art like this? Or this? Or this?

It’s a billion-dollar question. Well, more than that actually. It's estimated around $50 billion in art was sold worldwide last year.

Compared to stocks or commodities it’s hard to measure how much art is worth. Why? For many the value of art lies in the eye of the beholder.

Meaning one piece of art could be worth a lot to one person and nothing to someone else. You can get a sense of the ranging valuations of art in just one gallery. From one piece costing in the thousands of dollars.

All the way to a Picasso in the millions. What makes a Picasso worth millions? One reason is simple economics: Supply and demand.

Wealthy art buyers, whether they’re Picasso enthusiasts or investors looking for a place to store their money, all want to get their hands on a Picasso. But there are only so many Picassos left in the world. The supply shortage drives up prices as buyers outbid each other.

So sales in the high-end art market come from a select group of in-demand artists whose work, like Picasso’s, is considered scarce. The most expensive pieces of art sold across sectors last year were from artists who are no longer alive. Even in contemporary art, 25 artists accounted for nearly half of public art auction sales in the first six months of 2017.

Put another way, the art market is like the professional golf market. A handful of professional golfers make a lot of money, millions of dollars, when they win. But there are many more golfers in the field who earn just a fraction of those winnings.

The price for a piece of art isn’t just about the artist’s reputation. There are other factors at play, like the art’s size and genre, its condition, the prices of similar pieces and where the work has been exhibited. Art Fairs, like Frieze here in London, are an important venue for new buyers and they're likely to stay that way.

Sales at art fairs hit an estimated $13 billion in 2016, an increase of 57% since 2010. But half of art dealers in one survey said the costs associated with exhibiting at art fairs are a top business concern. This piece sold for around $20,000 and that’s considered a good value.

Even new buyers willing to spend thousands of dollars can be put off by the idea that they need to spend millions to be part of an exclusive club of art collectors. It’s the million dollar buyers generating headline after headline of record sales in the art industry. The top end of the art market is dominated by a select group of players who are pretty private about their business.

Which can make it tricky to value how much they’re actually spending on art. More and more art sales are conducted in private which attracts high net worth investors. These wealthy buyers are also lured by tax breaks for art donations or the prospect of making big returns on a piece of art.

Galleries, dealers and auction houses can be tempted to cater to high-end clients who pay millions of dollars for art, and who keep coming back, instead of to the average Joe. You can see this trend in a chart showing the value of art sales, the total dollar amount, versus the volume of sales, the number of transactions, in global fine art auctions last year. Art that sold for more than $1 million accounted for nearly half of the market’s value in less than 1% of transactions.

China has been driving a lot of the growth in high-end art sales since the financial crisis as it mints new millionaires and billionaires looking for places to invest their money. China ranks third in global art sales after the U. K.

and the U. S. , and those three countries combined make up 81% of global sales by value.

Just because some art costs millions doesn’t mean you have to pay that much. A worthwhile investment can be art that you like for just a couple of bucks. Hey guys, it's Elizabeth.

Thanks so much for watching. Check out more of our videos over here. We're also taking your suggestions for future CNBC Explains so leave your ideas in the comments section.

And while you're at it, subscribe to our channel. See you!