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Last month, Phillips de Pury attempted to sell a fibreglass statue of a colourful mushroom-headed cartoon character by Takashi Murakami, the supposedly recession-proof Japanese artist. Tongari-Kun - or Mr Pointy - was expected to fetch £3.5m. It didn't attract a single bid.

Boy, does the contemporary art market have a long way to fall. Typically, in 1984, a top work by an established artist would have sold for $43,000. Now, it costs $2m. That's a tidy 4,400 per cent rise in less than 25 years, much of that since 2005. As unsophisticated Mayfair hedge funders, Mexican juice producers, Ukrainian oligarchs and sheikhs dripping with Gulf oil have all put in their bids, the globalised market has left behind any resemblance of reason.  

Take Richard Prince's Nurse paintings, an appealing enough series of pulp romance images taken from the covers of trashy novels. Works like Surfer Nurse, Naughty Nurse and Dude Ranch Nurse were scanned from magazines and printed onto canvas, before Prince splashed on some acrylic to make them something other than photocopies. At Barbara Gladstone's Manhattan gallery in 2003, they were asking for, and generally not getting, $50,000. But last summer, a Prince Nurse fetched fully $8.4m.

As hedge funders and oligarchs put in bids, the market left behind any reason

But the signs now indicate that, as global economies slow down, so too will the inflated art trade. One visitor called a recent contemporary sale at Lyon and Turnbull in London, where lot after lot of minor works by Damien Hirst, Marc Quinn and Banksy either failed to reach their estimate or remained unsold, 'embarrassing'. Elsewhere, auction house porters have been being drafted in to pose as punters and fill up empty seats. Last night, at Sotheby's in New York, an auction that was supposed to fetch over $200m raised only $125m. This time, the steely gaze of Prince's Everglade Nurse could only seduce a winning bid of $3.4m.

Likewise, Damien Hirst's much heralded September sale at Sotheby's, which took place on the day that Lehman Brothers fell, is not now seen as quite the triumph its £95m return would suggest. There are persistent rumours that many works went to dealers who didn't want the value of the Hirsts that they already owned to fall, and that owners received phone calls reminding them how severely their investments would be damaged should they fail to bid.

The word on Bond Street is that buyers were also offered generous concessions. Whereas auction houses normally require payment within 21 days, some clients were being offered anything up to three years to pay.

And now, one collector told the Evening Standard that he was phoned up and offered a work that had already been sold at the auction, which suggests - though Sotheby's deny this categorically - that buyers are getting cold feet and reneging on deals. Over the summer, a gallerist tells me, auction houses were so inundated by collectors selling minor Hirsts that they've had to start refusing them. "Dealers are offering larger and larger discounts, though they never admit to this even in the high times", he said.

The Johnny-come-latelies have assets worth nothing near what they paid

Just like the housing market boom, it's the Johnny-come-latelies who are now sitting on assets that won't fetch anything near what they paid for them. Some of these are people, one seasoned sale-room hand put it, "who think Piero della Francesca is a shoe shop".

It isn't hard to see how they ended up paying over the odds for a later spot painting or a collage of dead butterflies. As the last crash was as long ago as 1991, speculators must have thought that prices would go on rising forever. Darlene Lutz, Madonna's long-time art advisor, told the New York Magazine: "This market is fuelled by collectors who have never been through a correction... the generations who did are watching this with disbelief. It's like teenagers who have unprotected sex thinking they'll never get pregnant. And then, whoops - look what happened!" ·