I've recorded my dreams for much of my adult life.

In terms of the OP hypothesis, it's interesting that my dreams often take place in familiar places, and furthermore, I seem to remember this better during the dream. e.g. "Awesome, I'm in that really cool city; I should go to the north end of this city where there is that giant cathedral on a hill" then waking and realizing the city only exists in my dreams and the cathedral was a past dream.

Sadly, this familiarity of certain places is the only concrete information I have of a dream "reality". Versus copious information to suggest it is just a bunch of hallucinations based on my memories. It's pretty clear which hypothesis gets Occam's razored.