It would have been perfect in Morrowind, where dialog was (relatively) easy to implement. Especially considering the environment. A recently dominated country. Racial lines drawn heavily. Slaves. Resistance movements. The constant loom of potential battles between factions. Sure, if you play as a Dunmer it felt about right, as the native dunmer like any outlanders, including dark elves. However, if you played as a Nord or orc I would expect other Nords/Orcs would greet you welcomingly. I should expect altmer and especially bosmer to by very tight with their own, and imperials and bretons to show some comradery. While playing as a khajiit or argonian could be a difficult journey, but among their own they would show some level of intrinsic trust that they couldn't afford with many others.
I think the biggest differences should have been in the cities. The settlements were clearly designed as either native dunmer or foreign imperial settlements, and visually they looked very different. Among people residing there, there were great disparities in terms of racial proportions. However, when talking to those citizens the cities didn't feel different. I feel the people in Pelagiad reacted the same to an Argonian PC as the people in Sadrith Mora did, which I think doesn't represent the individual feelings of the very different cultures that existed in those two cities.