When humans go to sleep, their brain rhythms change, slowing down.  There is a region, as anyone can discover for herself, between full waking and sleep when the brain waves have slowed to about 4-6 cycles per second.   Here worlds of waking and sleeping merge and visions can occur. 

While it remains a question of interpretation, look at what Joyce does here in the way of syntax.  Doesn't he make it impossible for us to know exactly  when this paragraph moves into dream?  Clearly, the boy is reporting a dreamlike image by the paragraph's end, but just as in real life, sometimes the world of nominal reality fades all but imperceptibly into the inner one as we doze.

What are we to make of this vision where the roles of Priest and student are reversed?