We have wallpaper in our small bathroom and actually it has only ever had wallpaper. Some of the backing isnt coming off and the glue residue is stuck on the walls (like a previous poster's problem) We will be tiling part of the way up then painting the rest. I'm thinking the work will be a horse a piece to take all the wallpaper down and prep the walls properly or to re drywall. If we were to drywall we would go with green board since the room is small with no windows. The drywall above the shower may get replaced regardless. I would like the drywall but my husband isn't the best at drywalling and mudding so the outcome may not be the best.
I happen to be watching the paint shaker in the painting forum and figured the DIYnetwork might want to buy my car.
If you do replace the drywall, then paint over whatever you have with a paint specifically meant for bathrooms, like Zinsser's "PermaWhite" Bathroom paint available from Home Depot.
The reason why the paint is peeling on your bathroom ceiling above the shower is because inexpensive interior latex paint don't have very good moisture resistance. Paints made to be used in bathrooms will not peel and mold won't grow on them either.
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