A VCAT hearing then takes time and money, reducing the incentive to build housing

not really. VCAT from a developers POV is a big fat "Fuck you council Imma gonna build it anyway" The legality very very rarely comes into it, it's that councils are invested in and beholden to the people that actually live in the area, so there are bigger concerns than legality - it' s extremely reasonable to object against bad builds - I'm not talking about those well-heeled cunts who want to maintain their class demographic. People live in the areas they do because of the attractiveness and amenities - and bad builds actively undermine these. The developers don't care, they just want the money - so they will tout the selling points of the area while actively destroying them, because those selling points are a social concern - that they offload. You even see this with new developments on old farmland, they don't upgrade the sewer system or roads because they can wave those off as not their problem - privatising the profits, socialising the costs.

VCAT overturning a councils rejection means that the development was legal in the first place.

An example of the fallacy of this would be something like the Greyhound - that was a key part of the queer community in Melbourne, a landmark in the area. People in the area - those that deal with this day to day - wanted it kept because it was a core part of the history and the society in the area. It provided a lot of resources. That's not a legal concern though, the guys that owned it, well legally they could grind it up and snort if they wanted. There's no heritage protection, so fuckit! It's still a loss to the community though, and last I saw still a dead empty lot with the promised apartments nowhere in site (in fact now it's going to be a "rental hub" - meaning that instead of a steady cornerstone we now have a rotating mess of people who aren't invested in the community. Its a huge social loss, but still entirely legal