One of my all time favourite modellers, Chuck Doan, developed this technique. It works best in O scale but could be adapted for HO.
You start by roughing up the stripwood or scribed board using a wire brush and exacto knife. Pay attention to any exposed edges or the bottom of the building. I always stain wood with diluted mixtures of Isopropyl Alcohol and shoe dye. I have used India ink instead. Black shoe dye (buy from a cobblers) can have a blue tinge so you need to add some brown as well. I have a couple of milk bottles of heavy and light dilutions. A really nice silvery grey can be hard to achieve so I often stain the wood darker and then sand it back to a lighter shade.
Once the wood is stained and assembled, you can do the paint layers. First soak the wood in a solvent-based thinner or alternatively I used Methylated Spirits. When the thinner begins to dry, brush on a thickish layer of an acrylic-based paint. The paint doesn’t “sit” properly on the wood because of the solvent. Leave it until it the paint just begins to harden, score it with a Xacto knife and take a strip of sellotape and use it to pick up fragments of the paint. You can worsen the peeling by repeating or using a knife to flake further when the paint hardens. My practice panel is behind the rusty tank above.
I used the techniques on the diorama below:
Strip wood (coffee stirrers) used to build the frontage board by board:
Scribed siding using the method described above:
A wood kit using the peeling paint method. The trim to the buildings were also painted using the peeling paint methods. The windows were plastic so I painted them using a pale undercoat and then the same top coat as the trim. The paint was “peeled” using a fibreglass brush to take off the top layer of paint. The window glass is Deluxe Materials’ Glue and Glaze. It is the easiest way to do windows from an older period but lacks the smoothness of modern window glass.