The Big Question: Why is the price of art soaring - and can the boom continue?

Why has Picasso's 'Dora Maar with Cat' fetched $95m?

Sotheby's had been confident that this important painting of Picasso's mistress would fetch a healthy price. The auction house underwrote the sale to the tune of about $53m, but as four determined bidders fought against each other in the packed Manhattan auction room, the final price of $95.2m blew that away. The picture is now the second most expensive ever sold, after Picasso's Boy with a Pipe (sold in 2004 for $104m).

Painted in 1941 as the artist's intense and creative relationship with Dora Maar was reaching its climax, Picasso's portrait is a large and vibrant canvas, and a real rarity in the art world. It has hardly been seen in public for the 40 years that it has been in private hands. As an exhilarated David Norman, chairman of the auction house's modern art department, said after the sale that it could be another generation before we see such a great Picasso appear at auction.

But the price tag reflects more than just the quality of this painting. The art market is booming, and this season of Impressionist and modern art sales in New York - which sets the tone for the rest of the world for the rest of the year - has been the most eagerly anticipated for more than a decade.

Why the boom?

Wealth. Times are good for the global rich, with new wealth emerging in Russia, China and Singapore, plus additional money washing around the Middle East thanks to sky-high oil prices and record bonuses in the financial business. Both Sotheby's and Christie's toured many of their lots through the Middle and Far East to drum up interest ahead of this week's sales. Christie's is opening an auction house in Dubai, in the United Arab Emirates, in the hope that growing tourism and a generation of younger buyers exposed to Western influences will broaden the art tastes and buying interests of local Arabs.

And there are more people joining the billionaires' club all the time. Although we don't know the identity of the Dora Maar's new owner, the neatly dressed 40-something sent to do the bidding holds a clue to where the most aggressive buying is coming from. Participants in the auction whispered that he was a newcomer (waving his paddle in an unsophisticated fashion, they said) and "sounded Russian". The same mystery buyer purchased a Monet for $5m and a Chagall for $2.5, spending more than $102m in total.

The mega-rich who emerged in Russia during the post-Communist anarchy have been looking for ways to spend, and flaunt, their new wealth, from football clubs to Mediterranean palaces and huge yachts, and have emerged as significant players in the art market. In the past couple of years, they have been joined by an upper middle class and a cadre of businessmen's wives who are starting to collect and run galleries.

Just how much are art prices up?

Measuring these things is an imprecise science, but Artprice.com, which has its own global index, reckons the increases suggest something close to a mania. Prices surged 16 per cent in just the first four months of this year, it says, and in New York, it appears that prices are some 42 per cent higher than they have ever been before. By the end of March, 117 lots had fetched more than $1m, almost twice as many as by the same point last year, and records have abounded. A major painting by J M W Turner fetched $32m, for example, earlier this year - a record for any British artist.

The Sotheby's auction of Impressionist and modern art on Wednesday, which included the Dora Maar, raised $207.6m, the most for one sale since the spring of 1990. A sale across town at Christie's the previous day was the second highest in that firm's history, when Van Gogh's L'Arlésienne Madame Ginoux sold for $40.3m, the fourth highest price for a work by that artist.

What are the Russians buying?

The big names of modern art, great global status symbols, have attracted some of the biggest bidding. Picassos will always be a safe choice. The artist has been consistently the top seller for the last two decades. Younger buyers, influenced by Russia's own strong modernist movement in the 1920s, appear to be interested in German Expressionism, works by artists such as Modigliani and those with Russian backgrounds, and, increasingly, in contemporary art.

There has also been an explosion of interest in the post-war American art scene, and a Russian buyer paid £2.6m for an Andy Warhol dollar-sign painting in London earlier this year. Russian tastes are guiding a gentle shift away from the fashions of previous years, and away from the lesser paintings of the Impressionist era. Of the 30 or so paintings of waterlilies floating on a pond done by Monet, Nymphéas, Temps Gris, sold on this week fetched a relatively modest $11.2m.

Who is selling?

Some of the sales are forced sales by corporate America, which has adopted a hair-shirt approach to kitting out headquarters since the "Greed is Good" days of the Eighties. Refco, a brokerage firm that went bust, is in the process of selling a $5m collection of contemporary photography which includes Andreas Gursky's Avenue of the Americas and Richard Avedon's Andy Warhol, Artist, New York City, August 20, 1969. Sotheby's sold a Renoir and a Monet that were among the trinkets amassed by Dennis Kozlowski, disgraced boss of the Tyco conglomerate as he looted the company.

Mainly, though, the sales appear to be from long-standing collectors. The $95m Picasso was being sold by Chicago's Gidwitz family, while the financier Henry Kravis fetched $18.4m for his Matisse, Reclining Nude, View of her Back. It might be a worrying sign.

So can the boom times continue?

This is the question haunting the market at the moment, and the reason why people are digging for the identity of sellers. If respected collectors are selling, and the nouveaux riches of emerging economies are doing the buying, we might be at the peak of a bubble. The echoes of 1990 do not help. Then, Japanese buyers had pushed the prices of Impressionist works in particular to record levels (the two highest paintings of all time remain Van Gogh's Portrait of Dr Gachet and Renoir's Bal au Moulin de la Galette, Montmartre, both sold in 1990 for $116m and $110m respectively) only to find prices collapsing in the years that followed.

It is worth remembering that the average price of Impressionists had only just recovered its 1990 level by the end of last year, and that the prices of modern art were still 20 per cent below those of 1990.

Artprice shows that the present mania is at its strongest in New York, but that there seems to be a much cooler market in Europe, particularly in London, which does not appear to have shown an increase in prices so far this year.

The auction houses argue that the market is "focused and controlled", not out of control, but there are already cracks. Not everything fetched extraordinary prices at New York's bellwether sales this week. In fact, three of the four main pieces in the Christie's auction fetched prices around the lower end of the auctioneer's estimated range. L'Arlésienne missed the low forecast of $40m, and another Picasso, A Musketeer, failed to attract a single bid. In some cases, buyers are starting to balk at the prices being asked by auctioneers.