Because the Linux kernel is incredibly complicated and shouldn't be trusted as a strong security boundary. A simple hypervisor likes has far fewer vulnerabilities so is an easier to trust boundary. They are in very different security tiers.

I would summarize as containers are good for mostly trusted isolation (teams within a company, purchased software) VMs are good for general untrusted software (different tenants in a cloud provider) and separate physical hardware is for scenarios where attacks are likely (military, known malicious code). Of course use cases are very fuzzy, but I wouldn't run fully untrusted code in the same kernel as anything of value.