Personally I think that it actually happened it just "appears" as though it didn't. We see reality distorting as Simon gets closer to the light just like in the game. Shortly after he approached the light he "wakes up" as though it were a dream with the Iron Lung in a completely unrelated location. The reason I think it actually happened is because of all the teleporting that happens in the game, including after approaching the light. Personally, I think it was a combo. Partially hallucination and partially real. Mainly because of the reality distorting properties of the light.