Three in four of an estimated 2,800 guest houses scattered across the city operate without a licence, a study has found.
The study comes after a fire in a North Point building filled with guest houses left 25 injured in December.
The research, which was carried out by an independent think tank of young professionals called the 30SGroup, comes amid a government public consultation on how best to update the 23-year-old ordinance that governs guest houses.
"We estimate that there are at least 2,000 unlicensed guest houses in operation and this equates to about 20,000 rooms," research assistant Kimberly Fung Wan-yin said. "The problem is very serious."
Most unlicensed guest houses were found in the Yau Tsim Mong district. And at least seven out of 16 guest houses on Dundas Street in Mong Kok could not be found in the government's database of licences.
The group said the number of unlicensed guesthouses reflected poor planning, with not enough land allocated for hotels. The guest houses also competed head-on for space with many of the city's lowest income households.
"The impact of guest house operations is directly felt by this most vulnerable group," states the 30SGroup report, published yesterday. "Unlicensed guest houses further reduce available flats for lease by taking up residential units that are supposed to house local people."
The figure of 20,000 rooms was derived from the average local occupancy rate - 89 per cent - and the difference between supply and demand in licensed accommodation, which suggests the city falls short of 6.9 million licensed rooms each year.
The group recommended the government consider cutting down on tourists and draw up a master plan on hotel land use.
Michael Li Hon-shing, executive director of the Federation of Hotel Owners, agreed. He added that the group's estimate that there were 2,000 unlicensed guest houses across the city may be too little.
"If you take into account those doing home stays and holiday houses, there would be more," he said.
Besides guest houses in urban areas, the government should also put effort into prosecuting village houses that are turned into accommodation," he added.
Li also agreed that the fines imposed on operators of illegal guest houses were too low. He proposed doubling the maximum penalty to four years' imprisonment.
According to the group, no convictions for running illegal guest houses had resulted in fines higher than HK$20,000, even though courts could impose fines of up to HK$200,000.
Just 22 people had been jailed over the past five years, all of them for less than two months.