If water seepage is a problem, and bubbles appear under the paint layer of the walls, the only alternative is wall tiles. From experience my lower floor have this 1 wall that is basically the hillside which was cut from original level, for years, i endured the bubbles and frequent repainting every six month or so, finally installed wall tiles. I used the 1 x 2 ft tiles, and it have no ill effects since installed about 3 years ago.

As for wall paper, if you do decide to use, most important is the surface preparation, the type of glue to be used must compliment the wall paper type to be used. Different brands of wall paper have their distictive brand of glue. If proper installation, wall paper can withstand many many years......