If any of the discolorations on the walls or ceiling or mold you've got some serious problems. Mold can cause serious health problems or even death.

The ceiling kind of looks like it's dipping in the middle to be, but it could just be the picture. I wouldn't add anything to the ceiling though. It will make it feel caged in. Removing popcorn ceiling is an annoying process but very doable for a DIY project. Removing that wallpaper is going to be worse but it will have to be done.

It seems odd that they didn't put the pipe into the walls, which raises some red flags. Was it exposed like that when you bought it? If it's all up to code I would wall it up.

It depends if it's an interior door, or the front door. If an interior door, if you wall it off, it looks like you might obstruct part of the door frame. I don't know if the other posters are talking about walling it off in a "box," or creating an entire fake wall across that wall, which which case you would need to either move the baseboards, or get new baseboards - and those are old baseboards and you may have to have them custom made - even though they are not fancy baseboards. As an alternative you could repair the holes in the floor and ceiling and paint the pipes the same color as the walls. A good drywaller should be able to repair the open ceiling corner. If you wall it off in a box shape, it could have the potential to look cheesy. In my previous house, it was an old house like yours and had the furnace pipe running up from the basement through a corner of the bathroom through the roof. I painted it the same color as the wall and it looked fine. May be difficult to get in the corners behind the pipes, but it's doable.

If you add weight to the ceiling, the whole thing may be weakened. It looks like a plaster ceiling (next to the wallboard) with some sort of textured plaster surface, not the typical sprayed-on popcorn ceiling. What was your experience with the other ceilings in the rest of the house?

When I say 'wall-it-off', I just meant put back the wall that was obviously there before (or better yet, use square corners and add some builtins or something, anything, to make it look less odd). It's pretty clear where the partition was before. A shame it pokes into the door trim but that's the charm of dealing with old houses.

You kind of have to decide if you want to remodel or restore when you have a room like this. Planking a ceiling seems a tad trendy but if that's all the budget allows...actually I'm sure drywall would be cheaper and easier and look better...

Sewer pipe and water pipes added after the house was built. Probably wasn't a bathroom up stairs originally.

Do not plank your ceiling. From photo it looks like rough plaster. If so, repair plaster with wallboard. It will be better than just straight sheetrock.