Within the two years we've lived in our house, the paint in our master bathroom has gone from glossy white to cracked and peeling in several spots. In addition to this, staple-shaped rust spots are appearing around the edge of the ceiling, where the drywall tape would be. The ceiling is slightly bubbling over the shower.
What do I need to do to save my walls and prevent them from getting worse? We do run a vent while showering.
First, everything woodchips told you in his answer is absolutely correct, and you should follow his advise about solving the cause of the excessive moisture. Your fan should run for 5 to 10 minutes after using the shower to clear the moisture.
With that said, let's examine the paint problem. I think there are a few factors causing the paint finish to fail. First reason is that moisture is obviously penetrating the paint layer and causing the paint to separate from the wall board, thus peeling or bubbling occurs. This is usually caused by a lack of a proper sealing/primer coat on the wall board. Today, we would use a moisture resistant drywall or mildew/mold proof paperless drywall, but even that would have to be properly sealed to prevent a finish paint failure. The primer has two functions. The primer seals the surface of the drywall to prevent moisture from being absorbed, and secondly creates a strong bonding layer for the paint to adhere to.
In your case, I suspect a couple of things happened. First, the wallboard was not primed properly and most likely a very cheap grade of paint was used directly on the wallboard and mud joints. (thus the rust spots showing through from the fasteners)
Follow woodchips advise and remove the problem areas. If some patching of damaged drywall surface is required, use a setting type drywall compound rather than general purpose compound. Setting type is less susceptible to moisture decay than regular compound. Vinyl spackle can also be used if the spots are small. The next step would be to properly prime the entire ceiling. I would highly recommend using an alcohol based pigmented shellac such as Bin's Bullseye primer. This product will seal the surface and block any moisture stains from bleeding though again. If the staining is very dark or wide spread, two coats of Bullseye would be a good idea. Gently buff sand and remove any dust from the freshly primed surface before painting. When painting, use a good grade of mildew resistant paint. I would use a satin or flat finish enamel instead of common flat ceiling paint. An enamel will give you a much more durable and moisture resistant finish. It will also bond very strongly to the primer.
Side note: Be sure the fan is vented to the out of doors. I have seen them vented directly into the attic space. Excessive moisture above a ceiling, especially around a cold soffit can cause moisture to migrate down through the ceilings close to an outside wall. This usually causes finish failures along the ceilings on an outside wall. Likewise, if a soffit area is very cold, moisture will condense on the interior ceiling surface along the outside wall from the inside and cause staining and finish failure.
This is surely moisture related.
So first, check that the fan is properly vented! Sometimes a vent fan simply dumps into attic space above the bathroom.
Second, run the fan for a longer time. Timer controls are easily installed, in place of the switch. It can be set to run for up to an hour, making sure the moist air is properly exhausted. With a timer, you can set it, then walk away, knowing it will shut off after the set period of time.
As far as repairs to the existing walls go, you MUST first stop the moisture, or it will simply happen again.
Once that is done, only then should you fix the walls, the ceiling, the paint. If there is bubbled paint, it must be scraped down, down to a solid surface. If the wallboard beneath it has bubbled, then you may need to replace parts of it. Cement board is a good idea in a wet environment anyway.
If there is any mildew, it must be killed. Chlorine is one way, but if it has gotten a foothold in the wallboard, then pull down that wallboard.
Once you have a solid substrate to now re-finish, paint, wallpaper, and tile are all viable ideas.
One solution can be to use wallpaper. It will help hide some flaws perhaps more simply than paint, but if this is just done to hide a problem without first stopping the problem, then it will peel off quickly.
Where paint will be used, always use paint that has had a mildew-cide added to stop the growth of mildew. If the wallboard itself has bubbled, before you paint, make sure any holes have been smoothly patched first or they will show through the paint. If there are any stains, Kilz (or similar products) can help to seal those stains before you re-paint.
Tile (my personal favorite) can be more resistant to water than wallpaper or paint. So you may choose to extend the areas that tile covers.
