We at ProCamera have been analysing the issue. What is being described as "waterpainting effect" is caused by OIS and SIS. Optical Image Stabilisation is always using multi-image-fusion to create the final image. This can cause patchiness in the image and create a "water painting" look.
When capturing RAW, no OIS/SIS is used as RAW files guarantee unprocessed sensor data. Therefore most users are reporting that RAW files look 'better'.
With apps like ProCamera you can disable AIS (automatic still image stabilization), which means it deactivates OIS/SIS on iPhone 6(S) Plus, iPhone 7 and 7 Plus and SIS on devices that only offer SIS (e.g. iPhone 6S).
However, this of course can lead to more motion blur. There is a tradeoff: either you use AIS (OIS+SIS) and get "sharp" photos that may exhibit patchiness and waterpainting like artefacts, or you get possible blurry photos when disabling AIS, but you will not see waterpainting effects.
There is also another alternative: apps like ProCamera offer an Anti-Shake capture mode which uses the device motion sensors to capture the photo once the device is held steady. This also reduces motion-blur without any multi-image-fusion. This is what we recommend when capturing RAW or TIF/JPG without OIS enabled.
When SIS was first introduced, we made an in-depth comparison between photos captured with/without AIS:
https://www.procamera-app.com/en/blog/image-stabilization-in-procamera8/
The post is a bit dated, however, it is still relevant as OIS uses SIS as well.
We recently made a post about capturing RAW which also talks about some technical details in regards to OIS:
https://www.procamera-app.com/en/blog/procamera-raw-dng-ios10/
Conclusion:
I believe there is nothing wrong with the camera hardware. Actually, we at ProCamera are very pleased with the quality of the camera hardware. However, we learned that many professional/discerning users prefer shooting photos without OIS/SIS (AIS).
AIS is great for snapshots and when you are not able to hold the iPhone totally steady. Also, many user seem to prefer "over-sharpened" images (at least on their iPhone screen) over blurry images. Therefore I understand that Apple prioritizes sharpness (which comes with a cost).
Tip:
If you are a professional/discerning user, check out third party apps that allow to disable OIS/SIS.