The master bathroom I gutted last year had the original 1970s thin wall panels on all the walls that weren't tiled---that is, the walls not immediately around the shower and sinks. It had held up remarkably well although there were a few spaces where the finish had faded a bit, and that's saying something. There was no ventilation in the room aside from a small window in the toilet area. Back then, it was real wood paneling, luan, I think, but you may not be able to get the real stuff any more, at least that's what an experienced wood finishing guy told me.

I kept the paneling on the wall adjoining the bedroom because of a pocket door I didn't want to mess with. I also reinstalled the paneling in the toilet area, which shares a wall with the bedroom. Then I painted it a color to coordinate with the tile and drywall in the rest of the suite.

For wood, prime with an oil primer and then two coats of paint on top, latex or oil, your choice. I recommend back-priming as well.

I've never had problems with wood molding or mildewing in a bathroom. And FWIW, in my kids' bathroom they have a wood ceiling and wood crown INSIDE the tiled tub surround. No problems or discoloration.

If you go with the faux-paneling, no worries there, just treat it the same with the exception that you don't have to back-prime the paneling.

I do recommend not using any MDF in a bathroom.

As to outlets and whatnot, you can get outlet box extenders at the home centers to extend the outlet box the thickness of the paneling.

You can use a simple backband around existing door trim to "thicken" the outside edge of the trim for the paneling to butt into.

The one issue might be behind the toilet, the clearance between the toilet tank and the wall. You could slip paneling in there fine, but thicker 3/4" stock might be too thick. Depends on your specific situation. If you go with thicker stock, you could box out the tank with trim and butt the paneling to the trim. Really depends on the tank, the wall, and what looks best.

Due to VOC issues, oil paints/primers are slowly being banished to eco-heaven. Latex primers are getting better. But for now I still prefer an oil primer over bare wood regardless of what the topcoat will be.

I wish I've known about "back priming" when I reinstalled the paneling around my toilet. Oh well, the stuff has held up well over the past thirty or forty years...

Thanks for the feedback! I will have to check and see whether the cheesy paneling is made of MDF or not. Otherwise, I will go searching for thin wood paneling . I saw some at Lowe's that's thinner than 3/4 inch, but not as thin as the fake paneling.

i can't find thin sheet paneling made of real wood.... what if we make our own sheet paneling using plywood? That would be better than MDF, and I'm guessing we could route a nice random bead without too much problem?

That's sound like a good idea. I may use it when I create the panel I've planned for plumbing access to the shower, which is next to the toilet. I've run out of the paneling I salvaged from the original bathroom.